Biomass Energy Management research report for Loider Inc

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CONTENTS

1. Acknowledgement: - ............................................................................................................................... 3 2. Executive Summary: - ............................................................................................................................. 4 3. Global Energy Situation: - ....................................................................................................................... 6 4. Energy, a basic necessity and a rapidly growing need: - ........................................................................ 8 5. Philippines Topography:- ........................................................................................................................ 9 6. Economic Scenario:- ............................................................................................................................. 10 7. Philippines Government Structure:- ...................................................................................................... 13 8. Philippines Political and Social Situation:- ............................................................................................ 13 9. Philippines Population Density: - .......................................................................................................... 17 9.1. Demographic and Economic Indicators: - ............................................................................................. 19 9.2. Lifestyle Indicators: - ............................................................................................................................. 19 10. Philippines Infrastructure Scenario: - .................................................................................................... 20 11. Ranking for Infrastructure in the World. ................................................................................................ 21 12. Philippines Foreign Direct Investment Policy: - .................................................................................... 21 13. Philippines Financial Situation: - ........................................................................................................... 22 14. Electricity and Power for Economic Development: - ............................................................................. 23 15. Demand for Power in Philippines: - ...................................................................................................... 24 16. Supply for Power in Philippines: - ......................................................................................................... 24 17. Current Power Situation in Philippines: - .............................................................................................. 26 18. Power Supply Outlook: - ....................................................................................................................... 29 19. Oligopolistic market in the Philippines: - ............................................................................................... 30 20. Philippine conventional energy scenario: - ........................................................................................... 30 21. Conventional Fossil Fuel demand and supply in Philippines: - ............................................................ 31 22. Framework of power industry of the Philippines: - ................................................................................ 33 23. Acts and Policy formulated and implemented by the Government Organization: - .............................. 36 24. Waste Management: - .......................................................................................................................... 39 25. Problems of Philippines power industry: - ............................................................................................. 40 26. Philippine power cost discouraging foreign investors: - ........................................................................ 43 27. Loss opportunity in conventional power: - ............................................................................................ 43 28. Necessity to develop new source of energy in the Philippines: - .......................................................... 44 29. Carbon Credits Mechanism: - ............................................................................................................... 46 30. Issue with sale of carbon credit in the Philippines: - ............................................................................. 46 31. Existing renewable energy projects in the Philippines: - ....................................................................... 49 32. Government Initiative to support and encourage Renewable Energy in Philippines: - ......................... 50 33. Government incentives under Renewable Energy Act 2008 of the Philippines: - ................................ 51 33.1. Non-Fiscal Incentives: - ...................................................................................................................... 51 33.2. Fiscal Incentives: - .............................................................................................................................. 55 34. “Biomass” Renewable energy scope in the Philippines: - ..................................................................... 57 35. Sugar mill “waste to power” Potential: - ................................................................................................ 58 36. Current problems of Philippines sugar industry: - ................................................................................. 60 37. Challenges for power co-generation in the sugar industry: - ................................................................ 61 38. Alcohol Distilleries In the Philippines: - ................................................................................................. 63 39. Distillery waste to power: - .................................................................................................................... 63 40. Sugar and Alcohol Industry Facing Environmental Issues: - ................................................................ 65 41. Organization supporting and promoting the sugar and alcohol industry: - ........................................... 66 41.1. Sugarcane and Sugar Industry Governing Bodies: - .......................................................................... 66 41.2. Alcohol Distillery Governing Bodies: - ................................................................................................. 67 42. Market, Policies, and Technologies, Blending the Pieces Together: - .................................................. 68 43. Background on Loider Inc.: - ................................................................................................................. 69 44. Background of the founder: - ................................................................................................................ 70 45. Location of Proposed Project: - ............................................................................................................ 71 46. The baseline methane emissions at CAT: - .......................................................................................... 74 47. Description of Project activity: - ............................................................................................................ 76

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48. Technology for the project: - ................................................................................................................. 77 49. Registration approval as CDM project: - ............................................................................................... 78 50. Identifying barriers preventing implementation of the proposed project: - ............................................ 79 51. Impact of CDM Registration: - .............................................................................................................. 80 52. Analysis of environmental impacts, including trans boundary: - ........................................................... 80 53. Stakeholder Analysis: - ......................................................................................................................... 84 54. Environmental Sustainability: Impact on Local Pollution: - ................................................................... 87 55. Investment and Credit Analysis: - ......................................................................................................... 88 56. Viability of the project, given cyclicality of sugar and energy price fluctuation: - .................................. 89 57. Human Resource and Organization: - .................................................................................................. 89 58. Risk Analysis and Mitigating Factor: - ................................................................................................... 91 59. Viability of project during disintegration of the Industry supply chain: - ................................................ 95 60. Proposed Investment structure: - .......................................................................................................... 95 60.1. Option 1: - Full Ownership of CAT: - ................................................................................................... 96 60.2. Option 2: - Joint Venture of Loader Inc., and CAT: - .......................................................................... 97 60.3. Option 3: - BOT (Built, operate, transfer) Loader Inc.: - ...................................................................... 98 61. Recommendation & Suggestion: - ...................................................................................................... 101 62. Company Mission Post Biomass Power Project Setup: - ................................................................... 104 63. S.W.O.T. Analysis: - ........................................................................................................................... 105 64. Porter’s Five Forces – Biomass Energy Developer: - ......................................................................... 107 65. Annexures: - ....................................................................................................................................... 110 66. Reference Sources: - .......................................................................................................................... 121

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1. Acknowledgement: -

I would like to express my gratitude to my advisors, Prof. Raymundo L. Roberto and Prof.

Fernando Y. Roxas, for their continuous support with valuable experience, methodology

and advices to motivate and guide me to accomplish my management research report.

My sincere thanks to my third panelist, Mr. Srinivas Polishetty of Loider Inc., for sharing

his real life insight, practical comments and approaches to make my report more realistic

and feasible.

I would like to thank the production and management team of Central Azucarera De

Tarlac and UPC Renewables Philippines, for accommodating and supporting me to

conduct field interviews and data collection to serve better research findings and analysis

for this strategy paper.

Finally, I am thankful to my supporting wife, family and my friends for their strong support

and encouragement to help me achieve good outcomes of this management research

report.

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2. Executive Summary: -

In the past decade, there has been a resurgence of interest in clean energy solution, not

only because of oil and fossil fuel prices have rallied to crisis or near-crisis proportions,

but because of the growing realization of the negative impact of conventional source of

energy, on the environment. The development of mechanisms, to monetize carbon

footprints is also providing an added impetus to pursue clean energy options.

Some of the most important development issues, facing the Philippines in the 21st

century are increasing population, rising fossil fuel price, food security, sustainable and

affordable energy sources etc.

Philippines, a consumption driven economy is one of the fastest growing economy of the

Southeast Asia. The high power cost in the Philippines, now the second highest in Asia

and among the highest in the world, is forcing the potential investors to have second

thoughts of investing in the country. Those, who have already invested are now

contemplating of moving to either China or Vietnam. The high electricity rates in the

Philippines have made them loose their competitive edge in the global market. Thereby,

as a consumption and production driven economy its fast growth and economic

development, depends to a large extent on creating self sufficiency in low cost and

clean energy sector.

Philippine is one of the largest sugarcane producers. Sugarcane and its related industry

generates huge volume of waste of which bagasse and field trash are being productively

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utilized for power generation, but mud press and spent wash, toxic byproducts, from

sugar mill and alcohol distillery, are left unutilized and dumped in the back yard, lagoons

and open fields leading to air, soil and underground water pollution. In other parts of the

world, with advancement of technology, this waste is being effectively utilized for

biomass energy generation. Biomass energy development can play a key role in

eradicating power crisis and creating self-reliant country and communities.

The Government of Philippines is realizing the importance and potential of renewable

energy, and is supporting and encouraging by providing incentives to the investors in

the industry, by means of various favorable policy i.e. both fiscal and non-fiscal.

Loider Inc. is primarily into Pharmaceutical business in the Philippines and is now

venturing into the clean energy sector by partnering with M/s. Innovative Environmental

Technology Limited (IETL) from India, and strategic alliance with M/s. General Carbon.

The latter alliance is to achieve Clean Development Mechanism (CDM) approval from

the relevant authority, as it is mandatory to be complaint to trade carbon credits. This

new venture would be focusing in the field of clean energy generation from biomass,

leveraging the widely underutilized sugarcane waste i.e. mud press and spent wash.

Apart from revenue generated by selling electricity to the closest distribution utility,

trading of carbon credits would be another source of revenue stream to bolster the

economics of the relevant project. Environmental depletion will take effect if sugarcane

waste is not managed properly (utilized /disposed), leading to odors nuisance,

groundwater contamination, and potential breeding ground for disease carrying vectors

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and reduces the aesthetic value of the neighborhood. All these factors are pushing the

government to have active participation by providing incentives to potential investors.

The proposed business will assist in reducing the country’s power shortage, and help

the sugar and distillery industry with other streams of revenue to offset the high

cyclicality and volatility of sugar prices, and bring in growth and sustainability to this

sector.

3. Global Energy Situation: -

For more than 4 decades, energy security has been an important global policy issue.

The global energy market is heavily dependent on fossil fuels like oil, natural gas,

and coal etc. That supports almost 80% of the global supply of principle energy

requirement. Shortage of resource is causing global destabilizing price fluctuation. The

extensive exploitation of fossil fuel is threatening energy security, and cause

serious environmental depletion concerns and climate change. One of the key

challenges, which the developing world has to soon face, is how to meet their

growing energy requirements and sustain economic growth without exhausting the

fossil fuel. Never ending, cleaner renewable sources of energy are the best alternate

solution to the global energy crisis, and waste management for example biomass,

which are renewable energy sources, have been receiving increased attention in

recent years.

The current scenario of World Energy Outlook is estimated that global primary energy

demand is expected to increase by 40% by 2030 with oil, coal, and gas to dominate

as the principle energy mix. The Island nations specially countries like Philippines,

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having limited indigenous energy resources and reserve, will drive the major demand for

energy. They will be forced to increasingly compete for a substantial share of the

world’s energy supplies.

Fossil fuels are limited and non-renewable resources. They take millions of years to form,

the reserves are being consumed and depleted much faster, than being replenished. The

basic principle of demand and supply suggest, that as supplies of hydrocarbons are

diminishing, prices are drastically increasing. Moreover high prices of fossil fuel reserve

will lead to increased alternative, renewable energy supplies, which previously

considered uneconomic, will eventually become economical and logical source to exploit.

The burning of fossil fuel discharge very high amount of carbon dioxide and it is

estimated that currently only half of that amount is being absorbed by natural process.

Carbon dioxide (CO2) is one of the greenhouse gases, which is contributing to the

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global warming, the unbalance of increasing production and absorption is causing major

environmental concern and increasing the frequency and magnitude of natural

calamities. The situation of crude oil is alarming. The Global oil supplies are likely to

face shortfall in the 21st century because of decline in production with none of the

new major fields being located on land. The prospective reserves, which are being

located, are expected to be in deep water or extensively remote location, resulting to

very high costs of extraction and production.

With the availability of global crude reserves limited to just a few selected countries

and locations, some with serious political instability, energy security will remain a major

concern and a reason future conflict and war. Price hike is expected to adversely

affecting the economies of developing nations, lacking oil reserve.

4. Energy, a basic necessity and a rapidly growing need: -

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Source: International Energy Agency World Energy Outlook 2011 and The World Bank World Development Indicators 2011.

At present more than 3.5 billion people lack adequate electricity for basic needs.

Additional 2 to 2.5 billion people will require energy as the world population grows fast

over the next 20-25 years. Thus in next 20-25 years, around 6-7 billion people will need

power and thereby increase the demand for electricity.

The global financial crisis caused a sharp drop in crude oil prices. The energy prices

particularly oil has already risen from a price as low as $40 per barrel (bbl.) in

December 2008 to around $100/bbl. in April 2011. The rises in energy prices will

seriously impact the economic growth and poverty reduction initiative in developing

countries. Forcing them to search for alternative sources of energy. Specially

encouraging the possibility of converting the Industry waste to power generation not just

to conserve fossil fuel but at the same time reduce the pollution from the waste and toxic

by products from industrial, commercial and agricultural operations.

5. Philippines Topography:-

The Republic of the Philippines is an archipelago with 7104 islands, covering an area of

about 300,000 square kilometers. Located strategically in center of developing South

East Asia, facilitating international trade between east and the west. The country has

three major islands namely Luzon, Visayas and Mindanao. Manila is the capital and the

largest city of the Philippines.

The country enjoys the trade benefit from two promising commercial route i.e. Pacific

Ocean and South china sea, promoting flourishing trade between China, Japan, India,

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Korea, Malaysia, Thailand, the upcoming economy of the world and easy access to

profitable growing ASEAN market.

6. Economic Scenario:-

The Philippine economy has witnessed a rollercoaster ride of progress and recession,

but has managed to sustain growth and gradual prosperity even in most difficult

economic downturn. The economy has relatively better performance compared to other

Asian countries, in time of, and after the destructive global recession. Like any other

Asian countries; Philippine was struck severely by the global recession. Exports dropped

by 17% and the stock market index dropped by 56% during 2009. But the economy has

bounced back fast, with real Gross Domestic Product (GDP) growing 7.6% in 2010.

International Monetary Fund (IMF) has projected a 5.1% real GDP growth, for year

ending 2012. The Philippine stock market index price is currently 2% higher than its peak

before during or before the global recession in 2007, the economic growth in the

Philippines averaged 4.5% during the 2001 – 2010 but the country is showing promising

growth now in last few years and attracting investors in the country. The government has

assured and promised to try to lower its government deficit, from 3.9% to below 2% by

2013.

The reduction in government spending, majorly on infrastructure development was one of

several factors which slowed GDP growth in the second half of 2011, The GDP growth

bounced back positively after heavy public spending by government on infrastructure in

2012.

The reason for growth despite recession is the minimum exposure and dependence, on

the troubled international securities. The lower reliance on exports goods and

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commodities are relatively high with committed domestic consumption. The large

remittance from millions of Overseas Filipino Workers, high growth and investment in

Banking, Healthcare, BPO and IT Sector has protected the economy from external global

turmoil and crisis. As per IMF, the government deficit is quite reasonable at 2.4% of GDP

in 2011 and is estimated to reduce to 1.9% in 2012. Philippines is having account

surplus, from growth in manufacturing exports of machinery and electronic equipment.

The high level of foreign income remittances is also helping. At present, inflation is

approximately 4.1%. The Philippine government is working on strengthening the

Philippine peso, and its impact on the competitiveness of the country today the peso is

strong against the US$ at a conversion rate of 41.60 PHP. Against 1 US$ (3rd August

2012) compared to approx. 53 - 55 pesos during August 2007. The Philippines financial

institutions are sound, and banks are having, capital adequacy ratio of around 15% of the

non-performing or under performing loans at just 4%. In short, the Philippine economy is

getting stronger after the global recession.

Philippines is currently an energy-deficit nation, having one of the lowest levels of

consumption of energy globally and the highest per unit cost in South East Asia,

at average retail rate of 18 U.S. cents per kilowatt/hour (KWH). Philippines lacks in

resource of traditional oil or fossil fuel. To match the country’s growing demand for

energy from indigenous sources the country is highly dependent on imported crude

oil and coal.

Philippines economy – Consumption Driven Economy (Philippine Daily Inquirer, Wednesday, March 28th,

2012)

BSP Governor Armando Tetangco Jr. of the Bangko Sentral ng Filipinas encouraged

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foreign investors to invest in businesses in the Philippines, promising that the country

was entering a sweet spot where enterprises could benefit “demographic dividends”

resulting from growing young, consumption-driven workforce. Philippines is ready to

follow the lead of neighbors like Malaysia and Thailand in experiencing the economic

benefits of a large number of working individuals who fuel consumption which is the key

driver of economic growth for the Philippines. “The current situation is where a

considerable part of the population is of working age is having high purchasing power,

encouraging increase consumption and investments, thereby improving the growth of the

economy. Developing and emerging economies are transitional economies, they are

moving from traditional closed economies to modern open market economies, which

involves, complex, innovative, structural or policy reforms in the capital or capital

markets. The smooth flow of inward foreign investment is critical for emerging and

growing economy. The injection of foreign currency, into the local economy, aids steady

infrastructure development. Moreover the risks involved in investing in an emerging

economy are higher, than those in a developed economy.

The Philippines Development Plan (PDP) 2011-2016, by the National Economic and

Development Authority (NEDA), has proposed economic development by huge

investment in physical and technology infrastructure, to attract foreign direct investment.

Government has taken strong initiative’s to fight corruption and gain the investor’s

confidence, and create a positive global image of the Philippines in the business world.

The Philippines if following the other developed and developing countries, which are over

dependent on technology, latest sophisticated gadgets and robotic machinery tools, that

need uninterrupted source of electricity for their optimum performance. The growing

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population, economy and infrastructure in the Philippines, in near future will demand high

consumption of electricity, the demand for which is proportionately growing with

development and utilization of technology.

The Philippines is one of Asia’s fast-growing economies. Modern energy is a basic

necessity. The demand is ever increasing, with a high standard of living, healthy

population and high literacy rate. The greater challenge, that we face is fighting and

eliminating energy inequality and crisis. There should be a vision and mission to create

energy access for all by 2050. Social economic development and poverty eradication are

the most important priority of a developing nation. The world will soon need, 15 times the

current equivalent electricity generation in next 7-10 years. As billions of people have

improved their lifestyles from rural lower class to urban middle class society into cities

with mobile lifestyles. With increased advance economies, people require more demand

of energy.

7. Philippines Government Structure: -

The political and social government of the Philippines is based on the republican model

based on the U.S. model, with a bilateral legislature and executive presidency, and a

judiciary, headed by the Supreme Court with the authority to review acts of the other

branches. In 1991, the Local Government Code was passed empowering significant

oversight and control over fiscal policy to local government entities.

8. Philippines Political and Social Situation: -

The Philippines is a catholic country, but is tolerant of all other religions .The structure of

the government is republican. The country is of democratic form, with a bilateral

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legislature and executive presidency. Philippines had been a democracy after gaining

independence from the USA, but it could not continue long. The country returned to

democracy again in 1986 after two decades of autocratic rule.

The transformation since the departure of Ferdinand Marcos in 1986 has been somewhat

disorderly. President Cory Aquino faced at least six coup attempts during her

administration. President Estrada with strong allegation of mismanagement and

corruption was forced from power in 2000 in a bloodless civilian coup supported by the

military. President Gloria Macapagal Arroyo has been accused of corruption and scams,

which has affected the Philippine economy and reputation severely.

The two most active rebel groups have a past record of violent antisocial and terrorist

activities in the Philippines resulting in political instability and risk.

• Communist Party of the Philippines–New People’s Army, a Maoist

organization based in the Luzon region, has been active for several decades.

• In Mindanao Muslim secessionist groups have committed political violence,

occasional kidnapping of foreigners for ransom and in January 2004, and

many important power plants were surrounded by Philippine security forces

in response to prevent attack to sabotage.

The Non-governmental organizations are very active in the Philippines. In the context of

power generation, the Philippines environmental groups tend to be the most important,

and have active participation in the news and capability of securing judicial intervention,

in the construction and operation of the environmentally sensitive IPPs. Power project

sponsors especially using conventional fossil fuel; often find the NGOs as obstruction in

successfully and profitably operating a plant.

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The Catholic Church has a significant political influence and power in the country, with

influence and control over the catholic population, which account for 85% of the

Population. The church was active in toppling both Marcos and Estrada regime. Trade

union or workers does not have influential power in the Philippines.

The Philippines has been seen as an attractive and promising site by foreign investors.

Since the end of Marcos Era, more so ever currently the big issue is corruption. In 2011,

The Transparency International ranked the Philippines in the position of 134th out of 178

countries in corruption in 2011. The government has allowed and encouraged private

and foreign sector participation through build-operate-transfer (BOT) schemes,

deregulation and privatize industries, such as energy.

The political and social arena is unpredictable and volatile, however manageable, for

private energy investment. After the catastrophic power crisis, that weakened the

economic and political foundations of the country in the early 1990s. The IPP sector

itself has been insensitive to the end consumers who are the people of the country who

have to pay for the high electricity charges. The current problems in the sector with

relation to high power prices and shortages of supply provide a focus for public

frustration. The volatile political environment poses challenges and limitation for the IPP

sectors. During 2005, a big controversy cropped up, regarding proposals in the Congress

to revoke the VAT-tax exemption for the IPPs and prohibit the transferring or passing over

of the increased costs to the end customers i.e. the general public. If it is approved, It

would result in buy-out provisions in the IPP contracts of approximately US$ 27 -28

billion.

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The Power Purchase Agreements negotiated and approved during the 1990’s even after

the currency fluctuation from the Asian crisis were largely honored, Re negotiation of

several power contracts took place out of a mandated congressional investigation of the

IPP, Renegotiation demands are popular in all infrastructure investments. The IPP review

was necessary under the Electric Power Industry Reform Act (EPIRA) in 2001, which

mandated unbundling of the electricity bills, so that consumers know the breakdown of

the cost of electricity. The unbundling removed the pass through mechanism (purchase

power adjustment), which was incorporated in the past to negate the impact of fluctuation

in the foreign exchange and fuel cost on the electricity generation industry. The pass

through mechanism resulted in a huge deficit in the late 1990’s as the government

absorbed the effects of the devaluation of peso. This resulted in an exponential growth of

IPPs at the extra cost to the general public. The common people could now see the extra

cost they had to pay for the Purchase Power Adjustment (PPA) renegotiated between

National Power Corporation (NAPACOR) and resulting in mass social criticism.

The electricity rates between the Philippines and developing countries gap is very wide,

what a consumer pays as only generation charge in the Philippines is same or even

more than what a consumer of other Asian countries pay for the entire one unit/kwh

consumed, with exception to Japan and Singapore.

Philippine has the high cost of electricity because the power generation cost, the end

consumers without any government rebate and subsidy shoulder all generation to

distribution, transmission and taxes -. In fact the PPA is added proportionately to the

various unbundled cost in the electricity bill. Philippines is the only country in the region

who has privatized energy sector, but also does not enjoy benefit from state subsidy. The

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end users have to shoulder the high power cost.

The Federation of Philippine Industries (FPI) chairman Menelao Carlos addressed that

the prohibitive cost of electricity may be the big reason for shrinking foreign Investment.

The current and the 15th president of the Republic of the Philippines during 2012,

Benigno Simeon “Noynoy” Aquino III is trying to make a positive change, The current

government is formulating and implementing policies which will have a positive impact,

on the political and social prosperity of the nation and will also help to regain the lost

reputation. Government policies are formulated with the motive to reduce corruption,

improving government services, push positive reforms in the education system, and

inspire campaign for good governance and justice. The evidence by the prosecution and

impeachment of corrupt and abusive government officials is encouraging, creating more

stability and faith in the government. With incentives to the renewable energy sector and

providing benefit in form of Feed in Tariff, net-metering etc. the government is promotion

captive cogeneration and foreign investment to produce power with alternate renewable

energy sources. The Insurgency in the southern island of the Philippines has been death

seriously. A Positive program has been successfully implemented to maintain peace,

order and discipline in the country. In the recent years, confidence of foreign investors

both in business and physical infrastructure has been growing multifold times.

9. Philippines Population Density: -

Philippines with 80 provinces grouped into 17 regions and the 2nd largest English

speaking country in the world. The population is expected to reach 97.6 million by 2012

and exceed 101 Million by year 2014. (Source: Sheila Crisostomo (The Philippine Star)

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January 01, 2012 12:00 AM.). Two of the main Island’s i.e. Luzon and Visayas are

having high population densities and improved infrastructure. The political, economic and

social stability in the region, with aid from foreign and government investment, there is

dire need for increased demand for power.

The population density (people per sq. km) in Philippines was last reported at 327 in

2012. Very recently, the HSBC Global Research department has forecasted the trends in

world economic development in the next 40 years. The countries with fast growing

population and improvement in law, health, education, governance and sustainable

power and infrastructure, will be better off than those with shrinking population and

existing very high per capita income.

The Philippines is estimated to be on # 27 on the list of the world’s largest economy in

next 40 years. The Countries, who are currently relatively poor on a per-capita, have the

potential to dramatically increase the size of their economies because of population

growth. For many countries, increase in GDP figures will support with increase in per

capita GDP. The positive effect of population on GDP growth comparatively will be higher

than the negative effect of increasing population on GDP per capita. Thereby, even if

more people will want to share the pie, size of the pie will grow bigger proportionately.

Moreover anticipating the population of growth, the demand and dependency on the

power sector is proportionately increasing. The individual citizen, cumulative being the

biggest end consumer of the power. Currently electricity is available to approximately

88% of the population, and the per capita election consumption is much lower than other

Southeast Asian countries, the reason is underutilization of deregulation of its electricity

industry. The industry instead of being competitive is dictating its terms and price to its

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end consumers. But with economic growth and prosperity the per capita consumption is

increasing, and there is urgent demand to improve the generation capacity to catch up

with serving 100% population.

9.1. Demographic and Economic Indicators: -

2008 2009 2010 2011 2012 Real GDP Growth (% growth)

4.2 1.1 7.6 3.7 4.2

Inflation (% growth) 9.3 3.2 3.8 4.4 3.4 Population Aged 65+: January 1st ('000)

3,717.1 3,868.6 4,025.3 4,186.0 4,353.0

Population Density (persons per sq. km)

303.0 309.0 315.0 321.0 327.0

GDP Measured at Purchasing Power Parity (international $ million)

331,170.1 338,512.9 368,542.0 390,406.3 411,895.6

Consumer Expenditure (US$ million)

128,251.3 124,346.1 141,079.2 162,947.0 169,497.4

Annual Gross Income (US$ million)

139,745.1 135,222.6 154,070.1 178,069.3 185,745.4

Annual Disposable Income (US$ million)

132,114.0 128,134.2 145,329.4 167,740.5 174,520.4

Source: - Asian Marketing Data and Statistics (www.euromonitor.com) World Economic Fact book 2012

International Marketing Data and Statistics 2012 Future Demographic - Global population forecasts to 2030

9.2. Lifestyle Indicators: -

2008 2009 2010 2011 2012 Internet Users ('000) 5,619.9 8,292.3 9,458.0 10,805.6 12,345.2 New Registrations of Passenger Cars ('000)

49.0 46.0 47.5 55.1 0.0

Consumer Expenditure on Food (US$ million)

45,484.5 43,732.4 49,233.1 56,478.1 58,451.1

Source: - World Consumer Lifestyles Data book 2012 (www.euromonitor.com)

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The above chart explains that with a GDP level of 4.2 in 2012 and inflation well under 3.4

ranking 115 out 221 countries in having a low inflation price. The increase in annual

disposable income, complimented with increase in population and high annual gross

income, the lifestyle pattern is improving and growing fast. The country is witnessing

accelerated consumption and demand for power; thereby development of sustainable

source of energy to fulfill the necessity of the population is on the top priority list of the

government.

10. Philippines Infrastructure Scenario: -

In the Early 80s the country's economy was very underdeveloped especially with relation

to power generation, transmission and distribution. The country was severely affected by

continuous brownouts & blackouts that lasted more than 8-10 hours almost every day,

discouraging the growth of the manufacturing sector. In fact Philippines is being badly

affected so it slipped from being one of the progressive region in South East Asia to one

of the economically backward in the region today. In early 90s the Ramos administration

formulated policies to address this issue by encouraging and inviting private players to

build and operate power plants that gradually will improve the country's power

infrastructure. Now 87.9 percent of the country's households have access to electricity.

The dependence on oil-run power plants was drastically reduced to 19 percent, from

previous high of 80 percent. Today Power in Philippines is generated from several

sources, like coal, geothermal, hydroelectric and many other renewable sources like wind

and solar energy, Biomass etc.

The Philippines has the lowest installed capacity and per capita consumption of

electricity in the entire south east asia after Cambodia and Vietnam. The poor

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infrastructure is resulting in a lot of wastage. At least 15-25% of the consumption of

electricity is wasted, which can be prevented by investing in a new state of art

infrastructure of transmission, distribution utilities and the grids, also strict government

regulation and implementation is required to reduce or discourage power loss due to

theft. Improvement in infrastructure will not only increase the supply of electricity but also

encourage new investment in power generation and with the end result of lower power

cost to the end users.

The Philippine power infrastructure needs a major upgrading and investments. The

blackouts and brownouts occurrence on the event of natural calamities like typhoon,

display’s the weakness of infrastructure, support and backup in response to

emergencies.

11. Ranking for Infrastructure in the World.

Date 2008 2009 2010 2011 2012

Rank 48 58 56 57 55

Source _IMD world competiveness chart

The above chart explains that though the over all infrastructure of the country is slowly

improving in 2012 compared to the year 2009/10 and 11. Thus, the government and

private organization has to inject more funds in the infrastructure, to avoid power failure

and continuous uninterrupted power supply, even during the worse of situation to gain

the confidence of foreign investors and over all development of the economy.

12. Philippines Foreign Direct Investment Policy: -

The Direct foreign investment grew rapidly in the Philippines, after the reintroduction of

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democracy in 1986, after infusion of foreign investment in Asian countries like Indonesia

Malaysia, and Thailand. Manufacturing and financial sectors were the largest recipients

of Investments. Infrastructure growth compelled President Ramos to aggressively

introduce independent power producer’s with perks and benefit’s, with promise to buy all

the power produced at a fixed rate and in US $, anticipating huge demand, to invest in

generation of electricity to cope up with the energy crisis. But privatizing the sector, and

passing the additional cost to adjust the PPA to the end consumers, has made electricity

very expensive. Labor cost in the Philippines is among the most expensive in the region

relative to per capita income. It is however quite high in terms of skills, adaptability and

control of the English language. But by far the biggest issue with regards to lack of fresh

investment is high power cost, which has to be immediately corrected.

In relation to land ownership, though it is limited to Philippine nationals and corporations

owning least 60% stock. The Foreign investors can lease commercial land for 50 years,

and renew once again for another 25 years. Once renewed for another 25 years it must

abide by the Agrarian Reform Law. Self-sustaining source of indigenous energy,

generation will reduce the cost of power in the Philippines. Thus, all this initiative is

encouraging foreigner’s to invest again in the Philippines and boosting the power

consumption and demand.

13. Philippines Financial Situation: -

The Philippine electricity industry is recession-proof because schemes and polices of

protection to energy industry players and burden is passed on to the end consumer.

Philippines has one of the highest rates of electricity in Asia. Thus, provides tremendous

potential for lucrative business venture, to invest in power generation in the Philippines

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for growth and profitability. The Philippine’s Financial Structure in recent years has

developed tremendously with many foreign financial institutions proposing willingness to

establish offices and operation in the Philippines.

The development banks, Investment bank and Venture capitalist’s are willing to invest in

new projects. To encourage foreign investment, the government regulation act of

controlling and monitoring of the foreign exchange was relaxed in 1993; It allowed

exchange of currency even outside the banking system. The earnings from foreign direct

investments, registered with the Securities and Exchange Commission (SEC) and

Central Bank could be returned without restriction. The Philippines financial markets are

extensively developed, facilitating the local financing options. The Development Bank of

the Philippines has been actively involved in financing new investments in power

generation. The lending proceeds have been public through the state- owned banks or

from the multilateral development banks. The Private access to both debt and capital

markets has been convenient and encouraged. Moreover, the financial sector in the

Philippines is developed competing with rest of South East Asian Financial institutions

head on, imposing a drag on domestic investment. Privatization of IPPs has encouraged

borrowing from the development and commercial banks for investment and boosted bank

financing.

14. Electricity and Power for Economic Development: -

Electric power is indispensable to the economic progress of a county. It is the backbone

of a developing economy and the building block of every civilization. Self-sufficiency in

power generation is forever increasing requirement of the country on the basis of the

measure of its economic stability, sustainability and growth. The modern day war is in

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fact fought over energy security. In fact, much of the slow economic development is

directly or indirectly the result of lack of energy resources specially electricity. The most

recent example will be the claim of China over the Spratly Islands, which has high

Natural Gas generation potential.

15. Demand for Power in Philippines: -

In 2011, the Philippines had a peak demand of 7,582 MW with a dependable capacity of

9,384 MW and required additional capacity of 300 MW. Between 2012 and 2030, peak

demand is estimated to grow by at least 5% annually as analyzed by Department of

Energy and requires additional 11,900 MW by 2030. This means that by 2030, the

Philippines will need approx. 21,300 MW by means of generation from new and existing

facility to meet the projected demand for electricity. According to Department of Energy

(DOE) by 2030, the country’s energy sale is projected to increase to 86,809 GWH. By

2018, increase up to 149,067 GWH., by 2030. These are translated to peak demand

from 9,226 MW in 2008 to14, 311 MW by 2018, to about 24,534 MW by 2030 according

to PDP 2009-2030. The demand for power is growing faster than the source of

generation, thereby increasing the gap between the demand and supply, moreover

providing huge potential and need for development of power infrastructure in the country

for existing and new players to venture.

16. Supply for Power in Philippines: -

With 7,000+ spread islands to cover, the Philippines is facing electricity market

challenges to provide services across the country. The 3 islands Luzon, Visayas and

Mindanao accounts for 75% of all energy demand and 87% of installed capacity. Few

religions in Visayas have witnessed peak demand increase from 131MW to 190 MW over

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the past five years, while maximum installed capacity reaches only 110MW. The pipeline

inter-island transmission projects, which have been proposed and implemented in recent

years, have not been able to completely solve the problem and has resulted in huge

transmission loss. Developing rural electrification has been a consistent objective of the

government for a long time, thus there is a huge potential for small-scale captive power

generation in remote location to cater to the local grid and the community.

Philippines currently is an energy-deficit nation, having one of the lowest levels of

generation and consumption of energy globally and the highest per unit cost in South

East Asia. The exceptionally high cost of electricity in the Philippines is because the

costs, from producing power to taxes and distribution - are passed on to consumers

without any government rebate and subsidy.

Looking at the data provided by DOE – Energy sector investment opportunity by Sec.

Jose Almendras, peak demand in Luzon is increasing from 7582 MW in 2011 to 7934

MW in 2012, there is no new investment with relation to the demand. The existing

capacity is same at 9384 MW. In case of Visayas the peak demand has increased from

1448 MW to 1486 MW but the existing capacity is stagnant at 1457 from year 2011 to

2012. In case of Mindanao the peak demand has increased from 1483 MW tin 2011 to

1549 MW in 2012 with existing capacity stagnant at 1682. Thereby, to balance the

demand and supply equilibrium there is an urgent need for investment in the power

generation to prevent further increase in the electricity price.

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Power Situation Outlook for Saturday, June 23, 2012, Source: ngcp.ph (National Grid Corporation of the Philippines) in MW. LUZON VISAYAS MINDANAO Morning Afternoon Evening Morning Afternoon Evening Morning Afternoon System Capacity

7848 7848 7848 1695 1695 1698 1094 1094

System Peak

7660 7651 7133 1385 1386 1397 1180 1176

Gross Reserve

188 197 715 310 309 301 -86 -82

Generation Mix as of Friday, June 22, 2012, Source: ngcp.ph LUZON VISAYAS MINDANAO Generation Plant Types

Percentage Generation Plant Types Percentage Generation Plant Types

Percentage

COAL 38.06 REB 0.09 COAL 19.18 DSL 2.65 REG 0 DSL 21.02 CC/NGPP 40.43 COAL 41.33 GEO 8.31 GEO 9.43 DSL 9.24 HYD 51.5 HYD 9.31 GT 0 THER 0 GEO 49.2 REW 0.12 HYD 0.15 HYD – Hydro THER - Thermal CC/NGPP - Comb Cycle/Natural Gas COAL – Coal GT - Gas Turbine REW – Renewable, REB DSL - Diesel GEO - Geothermal REG - Renewable Energy Biogas REB - Renewable Energy Biodiesel

17. Current Power Situation in Philippines: -

Philippine has exactly the right capacity for power generation if they run without

interruption, and at a full capacity to cater to the current demand of the Island of Luzon

and Visayas. If any moment of the time a power plant has a breakdown or slows down its

operation, brownout is common. In case of the island of Mindanao power shortage and

brownout is common due to very low generation capacity of power in that region to cater

to the demand. In 2011, the Philippines had a peak demand of 11,226 MW with a

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dependable capacity of 15,319 MW. Between 2012 and 2030, peak demand is

estimated to grow by 5.3% annually as analyzed by DOE. By 2030, the country’s energy

sale is projected to increase to 86,809 GWH., by 2018, up to 149,067 GWH., by 2030.

These are translated to peak demand from 9,226 MW in 2008 to14, 311 MW by 2018, to

about 24,534 MW by 2030 according to PDP 2009-2030.

The Philippines' gross domestic electricity consumption will expand by an annual

average of approximately 5% in 2011-20. The split between residential, commercial and

industrial power consumption is not expected to change radically in the ten-year period,

with each sector consuming roughly 30% of the total. Demand for electricity in the

Philippines has risen since the government introduced reforms to increase investment in

power plants in the early 1990s. However, growth in power demand has slowed in the

past five years or so, mainly owing to supply-side constraints.

Electricity consumption and supply 2009 a 2010a 2011b 2012b 2013b 2014 b 2015b 2020b Consumption (GWH.)

Industry 17,451 18,820 20,024 21,245 22,566 24,001 25,527 34,057 Transport 118 126 133 141 149 158 167 221 Residential 17,413 18,129 18,880 19,664 20,486 21,346 22,451 27,415 Commercial & public services

14,784 15,873 16,596 17,518 18,518 19,631 20,804 28,250

Other 5,350 5,544 5,756 5,989 6,239 6,509 6,803 8,470 Total 55,117 58,491 61,389 64,557 67,958 71,645 75,753 98,413 % Change, year on year

3.7 6.1 5 5.2 5.3 5.4 5.7 5.4

Source: Economic Intelligence Unit 2011 (www.eiu.com/energy) Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. ©2011 The Economist Intelligence Unit Ltd.

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Source: DOE (Ms. Lisa Go) DOE-Infrastructure-Philippines-2010-Summit

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18. Power Supply Outlook: -

• Luzon – As per the above diagram Luzon will need additional capacity of 11,900

MW by 2030. Currently only a 600MW GN Power Project is in pipeline and

expected operation in 2013. A minimum of 300+ MW additional capacity is

needed every year after 2011.

• Visayas – will need additional capacity of 2,150 MW by 2030. Currently stable,

but would need a minimum of additional 100 MW by 2014 increase on every year

basis till 2030.

• Mindanao – will need additional increased capacity of 2,500+ MW by 2030.

Currently in trouble, there is serious power shortage, rotational brown outs

ranging from 2 to 4 hours is ongoing and expected to get worse in dry season,

only one small project of 300MW of STEAG State Power Inc. is in process of

getting started and expected to be online 2013-14 earliest.

There will be a tremendous shortage if the supply will not grow proportionately to the

demand. With the economic development and recovery underway, current estimates

indicate a serious demand-supply shortfall in the next decade. The government

understands the need to attract and incentivize private investment to meet demand. The

potential for increasing generation capacity to meet the expected shortfalls in the

coming years, is becoming increasingly critical.

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19. Oligopolistic market in the Philippines: -

The Philippines power generation is currently under the control of four large groups,

namely Lopez, Pangilinan, SMC and Aboitiz. The other small ones like AES (600 MW),

Salcon (250 MW+) in Cebu and Bohol and Globe (Metro Bank) in Cebu and Capiz are

not capable enough to influence much for competition.

The situation is same with regards to distribution. It is controlled by Meralco 71% in

Luzon, Aboitiz (700 MW +) in Visayas and 300 + MW in Mindanao. Cepalco has 100+

MW in Cagayan de Oro, Ceneco with100+ MW in Bacolod and 30 MW in Bohol

(Salcon). All the rest are Cooperatives ranging from 5 MW to 20 + MW.

Thus, there is a urgent need for independent and new players to build a new power

base load and reserves and enter the profitable electricity generation market and

thereby create healthy completion for the win-win situation for both producer and end

consumers. The new players who are willing to invest should explore and exploit

sustainable local sources of energy for optimum generation thereby, to stop the

escalating power cost or the tariff to get Philippines to a competitive level against the

direct competitors i.e. the neighboring south east Asian countries. (Annex – 5)

20. Philippine conventional energy scenario: -

The Philippines 20-year energy plan 2010-2030, aims to ensure energy security by

making more use of the country's indigenous resources and reserves. Renewable-

energy production is also set to expand, with installed capacity expected to achieve

8,637 mw by 2030.

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21. Conventional Fossil Fuel demand and supply in Philippines: -

Oil demand: - Oil is the Philippine’s main source of energy but has steadily reduced

its dependence on imported oil since the mid-1990s, when it accounted for more than

50% of the country's energy use. In 2010 it reached 30% of Philippine energy

consumption.

Oil supply: - The Philippines will remain dependent on imported oil to meet its

demand for petroleum due to its low reserve. The domestic oil fields currently supply

less than 10% of the petroleum requirement of the country. In 2010 the Philippines

imported 69.3m barrels of oil, with estimated cost of US$5.4bn, compared to 50.7m

barrels, costing US$3.3bn, in 2009. The dependence on foreign oil will have to be

reduced for sustainable development and growth of the country.

The Philippine’s main oilfield is located in Galoc, in the waters to the northwest of the

island of Palawan, which started extraction in 2008. The oilfield, crude quality is similar

to Abu Dhabi grades, and had produced 6.3m barrels of oil by end-2010, more than

one-half of its estimated reserves of 10m barrels

Gas demand: - The government is supporting and promoting the use of natural gas.

The consumption is expected to grow rapidly by an annual average of 6.5% in 2011-

20. Estimated by 2020 natural gas will account for around 9.2% of the country's total

energy mix from 7.5% in 2010.

Gas supply: - The Philippines' local supplies of natural gas grew rapidly in 2001,

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when production began at the Malampaya gas project in Northwest region of island of

Palawan at a cost of US$4.5bn, country's largest foreign investment. And is extracted

from 3,000 meters below the seabed through a production platform, and channeled

through a 500-km pipeline to a power plant in Batangas city, in Luzon. The project is

managed and operated by the local subsidiary of an Anglo-Dutch oil company, Royal

Dutch Shell, and Chevron of the USA, estimates its reserves of 76.5bn cu meters.

Coal Demand

The Philippines' coal consumption is expected to grow annually at an average of 6%

in 2011-20, with 14,000 kilotons oil equivalent (KTOE.) by the end of the ten-year

period, compared to 7,795 KTOE., in 2010. Though coal-fired power plants attract

criticism from environmental campaigning groups, to reduce the country's dependence

on the most polluting fossil fuels, the government and country is not in a position to

exploit as the demand and consumption for the electricity has to be balanced.

The new coal-fired plants are expected to operate in the near future and, and the use

of domestic coal will increase if it is to achieve its objective of reducing dependence on

imports.

Coal Supply: - Estimated to have 350m tones of coal reserves, the Philippines

currently imports for about three-quarters of its coal.

Consumption: - Philippines imported 6.4m tones of coal at a cost of US$447m in

2010, compared to 5.8m tones for US$ 382 Million in 2009.

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The country's reserve for coal mine is the Panian mine on the Semirara, Caluya and

Sibay islands in the western Visayas region and is operated by, Semirara Mining

producing 4.8m tones of coal in 2009, compared to 3.4m tones in 2008 a 41%

increase. Multinationals and local companies are in search for unexplored new coal

deposits. Even though coal exploration will continue, foreign investors will be hesitant

because of political and legal risks in the country.

22. Framework of power industry of the Philippines: -

The Power Sector Generation Competitive National Power Corporation

Independent Power Producers Transmission Regulated TRANSCO Distribution Regulated Private Utilities (DUs) Electric Cooperatives Supply Competitive Suppliers

Source-EPIRA act

The Arroyo government under the EPIRA ACT of 2001 currently has mostly privatized

the power sector. The government electricity agency NAPOCOR was highly indebted to

foreign credit agencies and banks because of their existing irrevocable expensive fixed

rate contracts with the IPP’s signed during the President Ramos administration. Thus,

the government owns assets were being sold to private company with the benefit of

paying the debt as well as improving competition, efficiency and thereby reducing power

cost to benefit the nation.

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Four ways of privatization of power industry were implemented: -

• Build Operate transfer- where Independent power producers (IPPs) produce

electricity government owned by National Power Corporation.

• Full privatization through asset sale- generation assets will be totally

privatized and sold to the private companies.

• Management contracts- IPPs will just operate the plants but control will be

under NPC.

• Electric Cooperatives- electric coops can be converted into corporations.

The sole objective of privatization has defeated the purpose of the EPIRA (Electric

Power Industry Reform Act). The government i.e. Arroyo government have instead

created a monopolistic market by mutual agreement between private players and

increased the cost of electricity more and passed the burden to end consumer through

Power purchase Agreement through GRAM (generation rate adjustment mechanism).

The unbundling scheme mandated by government for the transparency benefit to the

consumers, induced the private producers to come up with an idea to proportionately

distribute the adjusted PPA expense to be added in five heading shown below and

passed the same to the consumers, thereby exploiting the end consumers.

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The Philippines government thereby to regulate the private producers has

implemented various laws to protect the interest of the nation and its stakeholders.

PPA

Part of Genera,on Charge

Part of Transmission Charge

System Loss Charge

Franchise Taxes

GRAM (Genera,on Rate Adjustment Mechanism)

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23. Acts and Policy formulated and implemented by the Government

Organization: -

Build-Operate-Transfer Law or “Republic Act 6957 of 1990” – It is “An Act

Authorizing the Financing, Construction, Operation and Maintenance of infrastructure

projects by the private sector and for other purposes” The executive order renamed the

existing BOT Centre as the Public-Private-Partnership (“PPP”) Centre and transferred it

from the Department of Trade and Industry (“DTI”) to the National Economic and

Development Authority (“NEDA”).

The three major functions and powers of the PPP Centre are as follows as mentioned in

the act

• Conduct project facilitation and assistance to the national implementing

agencies, including government corporations, and local government units

(“LGUs”) in addressing impediments or bottlenecks in the implementation of PPP

programs and projects.

• Provide advisory services, technical assistance, training and capacity

development to agencies/LGUs in PPP project preparation and development.

• Recommend plans; policies and implementation guidelines related PPP in

consultation with appropriate oversight committees, implementing agencies,

LGUs and the private sector.

Republic Act (RA) 7638: Department of Energy act of 1992- Created the

department of Energy and declares state policy and objectives for the energy sector.

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The Department of Energy (DOE) shall prepare, integrate, coordinate, supervise, and

control all plans, programs, projects, and activities of the Government relative to

energy exploration, development, utilization, and conservation. The law mandates the

DOE to “formulate” policies for the planning and implementation of policies for the

efficient supply and economical use of energy consistent with the policies on

environmental protection, and conservation of ecology and society and also to develop

and update the existing Philippine energy program.

RA 7832: Anti-Pilferage of Electricity and Theft of Electric Transmission Lines/Materials Act of 1994

This law basically deals with penalizing the pilferage of electricity and theft of electric

power transmission line, etc. It targets a single-digit national average system loss by

2010, but has not achieved it target by 2010.

Electric Power Industry Reform Act (EPIRA) 2001: The main motive behind

the reforms were the fiscal deficit trap created by the debts taken by Napocor that and

power crisis in 1990s. The act introduced many reforms in the power sector with the

goal of promoting competition and efficiency. It removed the National Power

Corporation’s monopoly in generation of power, and made a provision for privatization

of 70 percent of its generating capacity in Philippines. This has led to private sector

participation power generation. EPIRA also has policies to promote and use of new

renewable energy resources in power generation in order to reduce its dependency on

imported energy.

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The key highlights of the act are

• National Power Corporation (NPC) was restructured separately into transmission

and generation component.

• Policy for privatizing the assets NPC

• Establishment of wholesale spot electricity market (WSEM)

• Introduced competition for the private players by giving open access to

• WSEM and all power distributors.

• EPIRA act also led to the creation of the Energy Regulatory Commission (ERC).

The ERC, like the ERB is an independent and quasi-judicial body with broad

powers over the industry, that revolves around its exclusive authority, to set

electricity rates.

The key functions of ERC are:

• Promote healthy competition

• Encourage overall market development

• Penalize for abuse of market power; ensure reliable and continuous power

supply to consumers.

The Department of Energy (DOE) “formulate” policies for the planning and implementation

of a comprehensive program, for the efficient supply and economical use of energy

consistent with the policies on environmental protection, and conservation and

maintenance of ecological balance”, and to “develop and update the existing Philippine

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energy program with preferential bias for environment-friendly resources.” And encourage

and producers to invest and protect consumers at the same time.

24. Waste Management: -

Waste management is a major concern today in developed and developing economy; it

not only causes air, soil and water pollution but also disposal and treatment for the

same is expensive. Thereby, the government of Philippines has also implemented

policy with regards to environment protection and encourages clean environment and

nature.

Philippine Environmental Impact Statement Law of 1978: Regulations against pollution

or environmental degradation encourage the shift to cleaner fuels and end-use efficiency.

This degree prohibited the operation of an “environmentally critical project or area”, which

invariably includes energy projects, without first securing an Environmental Compliance

Certificate.

Philippine Council for Agriculture, Forestry and Natural Resources Research and

Development (PCARRD) will also be implementing the “Baseline Information and

Development of Database on Swine Waste Management Systems” project, which will

examine the quality of methane produced by different designs of biogas system.

Department of Environment and Natural Resource (DENR) is the government agency

that monitors and enforces environmental rules and regulations. DENR is the

Designated National Authority (DNA) for the Clean Development Mechanism in the

Philippines. As DNA, the DENR facilitates the development and approval of CDM

activities. It screens, evaluates, and decides whether a project contributes to the

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country’s sustainable development. As of August 2008, there were already 19 projects

registered with the CDM Executive Board, of which 10 are biogas capture projects from

animal waste and two are from wastewater treatment. EMB serves as the CDM

Secretariat.

Clean Water Act of 2004 (R.A. 8749): DENR is also the government agency

that implements the Philippine, which sets the water discharge standards by which

industries producing wastewater must comply.

RA 8749: Philippine Clean Air Act of 1999: Comprehensive pollution control

policy that sets limits on emissions from mobile (vehicles) and stationary sources

(including power plants). Thus, the above law mandated power sector and industries in

the Philippines to properly treat and dispose their hazardous toxic waste for a better

environment. This process of waste treatment is expensive and requires huge

investment. This provides opportunity for new players to generate power from this

waste, so that they can earn profit from not only sale of the generated power but also

additional revenue from the waste treatment of the industries, and with the end motive

of improvement of the environment. Thus, this not only will remove the problem of

power shortage but also simultaneously handle the waste management issue of a

country

25. Problems of Philippines power industry: -

The Traditional Fossil fuel prices have been sharply rising both with regards to price and

shortage of availability. Moreover, there is a need for alternate and sustainable source

of energy to meet the ever-growing demand and consumption.

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Philippines lack’s the extensive and adequate domestic reserves of oil and coal. It must

import most of its fuel needs. Philippine has to invest substantially into more resources

in its transmission infrastructure than most of other countries, the challenge to transmit

electricity to the dispersed 7000+ islands. This country is prone to natural disasters like

earthquakes and tropical storms and so it need’s to develop infrastructure, which is

capable of withstanding property damage. The lack of local developed capital markets

or sufficiently liquid financial sector means that even the government needs to borrow

its finance from multilateral foreign sources.

The electricity demand curve in the Philippines is comparatively volatile in comparison

to the other countries. Lack in strong industrial sector means there is a very low base

load demand on a 24-hour basis that escalates the cost of installing facilities to cover

the peak demand. The country also lack’s the domestic source for the technology and

equipment essential for development and fabrication of modern electricity infrastructure.

Moreover, the very critical inputs for the electricity sector has to be imported at

international prices and subject to foreign currency exchange risk and inflation. These

immutable characteristics were exacerbated by the structure and implementation of the

IPP program. The fast build-out of IPPs in the 1990’s suffered the impact of the Asian

financial crisis in 1998, with the cost of electricity began to escalate dramatically due to

a combination of the high fixed investment and operation cost of the IPPs.

The Philippines will have to gradually reduce its dependence on imported energy as

petroleum products, and coal from overseas because of high price and high

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predictability of supply with regards to political, and economic crisis in the current world.

Hereby, Philippines has to restructure the energy mix and make more use of the locally

available fuels reserve. Fossil fuels though will remain the country's principal source of

energy, but the Philippines has to develop and exploit its alternative energy sources.

Despite opposition from environmentalists and social groups, the percentage of the

country's electricity that is generated by coal-fired power plants will increase. There has

been expansion and exploitation of coal production at the Panian mine in the Visayas

and at new mines on the southern island of Mindanao, though the Philippines will

reduce the volume of coal that it imports but has to realize the coal reserve of the

country is not indefinite.

Industrialization and modernization, is increasing the consumption and demand for

power resulting in increase, burning of fossil fuel emitting harmful green house gasses

depleting the atmosphere resulting in Global warming and natural catastrophe.

Climate change in the Philippines and its impact on the extreme weather condition has

resulted in major natural disaster in the form of typhoons, which hit the political, social

and economic stability with a big blow. The Ondoy of 2009 left the country with

thousands of loss lives and damage of property and investment worth billions of dollars.

The typhoon Sendong of December 2001 left about 1500 dead and with thousands still

missing and displaced, and damages amounting to about, US$ 30 Million. As per

Margareta Wahlstom, of UN international strategy for natural disaster reduction 33

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natural calamities struck the Philippines in 2011, which is #1 in the list with regards to

recorded calamities. China with its huge landmass is just 2nd with 21.

26. Philippine power cost discouraging foreign investors: -

The high power cost in the Philippines, which is second highest in Asia and considered

among the highest in the world, is forcing potential investors to have second thoughts of

investing in the country. Moreover, those who have already invested are now

contemplating of transferring to either Cambodia or Vietnam, since the high electricity

rates have reduced their competitive advantage in the global market to compete with

power intensive industry of countries with very economic power tariff. Producers and

manufacturers suffer the most, with its average retail rate of 18.1 US cents a kilowatt

hour, the Philippines eased out Japan as the country with the most expensive electricity

in Asia with Singapore at 14 US, Thailand’s 9 US cents, Malaysia’s 8 US cents, South

Korea’s 7 US cents, Vietnam’s 6 US cents, and Indonesia’ s 5 US cents.

27. Loss opportunity in conventional power: -

An Initiative to drastically reduce electricity price though starting of nuclear power plant

in Bataan, north of Manila. A natural death occurred after the nuclear power plant in

Fukushima, Japan collapsed because of earthquake and tsunami triggering global

concerns about the safety of nuclear plants as Philippines is prone to natural disaster

i.e. typhoon and earthquakes.

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28. Necessity to develop new source of energy in the Philippines: -

Realizing the necessity of new source and generation of power, the government is keen

to take drastic steps, to encourage development and investment in the Power sector. In

the Philippines the Government has recently been proposing and implementing various

policies, which will encourage huge investment in the sector both for traditional fossil fuel

and renewable source of energy. For effective implementation of the policies has created

departments to ensure the policy is implemented with optimum impact.

Renewable Energy: is energy which comes from natural resources, which are naturally

replenished, such as sunlight, wind, rain, tides, and geothermal heat,. In 2006 18% of

global energy consumption came from renewable energy and 13% of it being produced

from biomass.

Biomass is from plant material. It is a renewable energy source because the energy it

contains comes from the sunlight via the process of photosynthesis. When the plants or

their waste are burnt, they release the stored sun's energy.

There are mainly two approaches for using agriculture and plants for energy generation.

First is growing plants specifically for energy use termed as first and third-generation

biomass, and using the byproduct or residues is termed as second-generation biomass.

The 2nd generation source is under utilized and also source of hazardous water, air and

soil pollution and treatment for which is expensive. Thus power generation from the 2nd

source will be the most sought after concern for next few decades.

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World supports for renewable energy vide Kyoto Protocol: - Admitting that the

developed countries are substantially held responsible for the current high levels of

GHG emissions in the atmosphere. As a result for the current high levels of GHG

emissions in the atmosphere due to heavy industrial activity for a period of 150 years,

most countries joined an international treaty over a decade back, the United Nations

Framework Convention on Climate Change (UNFCCC) to consider what possible

actions to implement to reduce global warming, and possibility to mitigate the increase

temperature, which is inevitable. A number of nations approved to the treaty: the Kyoto

Protocol sets binding targets for 37 industrialize countries, and the European Union

members for reduction in greenhouse gas (GHG) emissions.

This commitment targets to reduce net collective GHG emissions, by at least 5.5%

below the existing emission levels of 1990 in the first undertaking period from 2008-

2012. The Kyoto Protocol was incorporated in Kyoto, Japan on 11th December 1997

and was effective starting 16 February 2005. As of today 184 members of the

Convention have ratified its protocol. Under this treaty, the member countries must meet

their targets through extensive national measures. Moreover, by means of three market-

based mechanism the Kyoto Protocol presents an additional mechanism of meeting

their targets.

The 3 mechanisms are: -

• Trading of Emission --- known as the “ the carbon market” to generate extra

revenue and encourage investment.

• Clean development mechanism (CDM).

• Join implementation (JI).

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29. Carbon Credits Mechanism: -

Carbon Credit is currently a part of a tradable permit scheme whereby there is an

incentive and motivation, to reduce the harmful greenhouse gas emissions by providing

them a financial value with the attempt to reduce global warming. A credit gives the

owner the permit to discharge one tons of carbon dioxide. The parameter for

measurement is 1 credit = 1 ton of CO2. Thus, now those who are emitting CO2 in the

atmosphere are forced to buy the carbon credit, which is currently being sold in the

open market. Carbon Trade established in 1998 with the introduction of carbon credit as

an international developer of renewable energy projects using solar, wind, biomass and

other clean technologies to produce electricity, and carbon credits to promote and help

and fund projects in exchange for reducing GHG emission or carbon credits. It provides

carbon credits called Certified Emission Reductions (CER), including the monitoring,

project design document, verification, certification and registration through the CDM of

the Kyoto Protocol of 1997. Carbon credits have to be certified and registered if they are

to be sold or traded. The organization have extensive presence and experience in RE

projects in many countries like Argentina, China, India, Indonesia, Malaysia, Paraguay,

Philippines, Sri Lanka, Jordan, Thailand, Taiwan and USA etc. with a social and

economic mission which is to develop high potential and sustainable renewable energy

projects, that will drastically reduce our dependence on imported fossil fuel, and control

global warming.

30. Issue with sale of carbon credit in the Philippines: -

In the past the RE producers in the country was facing difficulty to en cash their carbon

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credit certificate, but recently various financial institution are taking initiative and

responsibility to sell the carbon certificate from local producers for a service fee to the

international buyers like the world bank.

The Land Bank of the Philippines has agreed to trade carbon credits sourced from

methane-capture projects to the World Bank; this provides the state-run bank additional

stream of revenues of approximately 2.44 million euros over next four years. And also

encourage growth and investment in RE projects in the Philippines.

Land bank is among top 10 banks in the Philippines ranking at the 5th position currently.

The bank will act as “managing and coordinating entity” of the “Methane Recovery from

Waste Management Project” that encourages landfill, piggeries operators, biomass

power generators etc., to invest in technologies to capture methane for fuel to generate

electricity. Methane is a lethal greenhouse gas and is said to account for third of the

Philippines greenhouse gas emissions.

The carbon credits, officially called carbon emission reductions (CERs), would be

issued to them who use methane to generate power, substituting for electricity supplied

by fossil fuel consuming power plants, and follow strictly the guidelines of the R.E. Laws

of the country

Land bank as a managing and coordinating entity is expected to acquire CERs from

authorized local government agencies and R.E. project developers. And selling it to the

World bank protected by the emission reduction purchase agreement which was

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undertaken, under the Clean Development Mechanism (CDM) supported by the Kyoto

Protocol that awards CERs to greenhouse gas emission-reduction projects in developed

and developing countries. The CERs can also be sold to governments or industries in

developed countries to reduce their emissions or compensate for exceeding their green

house gas emission quota. The Land bank President Gilda E. Pico states that the

agreement displays the bank’s commitment to address the issue of global warming. It is

the first bank in the Philippines to venture into carbon credit purchase sale agreement.

The World Bank Country Director Bert Hoffman added, how this mutual agreement

could be used to induce and encourage and private and public investments in green

house reduction emission projects.

World Bank has purchased the CERs from Land bank, using Spanish Carbon Fund.

Land bank banked P5.4 billion in net profit that year, and now is inducing other financial

institution to enter this lucrative business model. The newly set up multinational wind

energy company UPC Renewables, B.V. was able to sign a contract with Climate

Change Capital of with headquarters in London to purchase 100% carbon credit for 5

years starting from the date. UPC will start generating and supplying electricity at

prevailing market price, less 25% as their profit margin.

This partnership will encourage the renewable energy producers to sell their carbon

certificate and thereby attract more investors in this industry.

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31. Existing renewable energy projects in the Philippines: -

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32. Government Initiative to support and encourage Renewable

Energy in Philippines: -

Renewable Energy Act in the Philippines: - In 2008, Philippine President

Gloria Macapagal-Arroyo signed the Renewable Energy Bill. Thereby, the Philippines

now has a renewable energy law. This new formed Renewable Energy Act of 2008 (R.A

9513) promises to improve, explore and develop, renewable energies such as hydro,

geothermal, solar, biomass, wind, ocean and tidal energy systems. Just after President

Arroyo signed the Biofuels Act it took around 2 (two) years for the R.A. 9513 to finalize

and another two years to enact. With the implementation of this new law, the Philippines

Department of Energy (DOE) expects to generate at least 4,000 megawatts (MW) of

renewable (RE) facility in the medium term. DOE expects that renewable energy will

provide the country’s 43% of the primary energy requirements over the 10-year period

starting 2003. The law will assist and reduce the negative impact of climate change, and

will allow the country to achieve its 65% energy self-sufficiency by 2010, and capture

major part of renewable energy and investments which in 2007 amounted to $71 billion.

Renewable Energy Policy Framework (2003): - Summarizes DOE objectives,

policies, and strategies for promoting further development and utilization of renewable

energy.

RA 9513 Renewable Energy Act 2008: -This act promotes the accelerated

exploration and utilization of renewable energy resources of power which can be

locally produced to reduce the dependence on fossil fuel and imported power energy.

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33. Government incentives under Renewable Energy Act 2008 of the

Philippines: -

33.1. Non-Fiscal Incentives: -

Renewable Portfolio Standards is under the RE Act & IRR the purpose is to

encourage and contribute to the growth of the RE industry. It is a market-based policy

that requires or mandates electric suppliers in the Philippines to source an agreed

portion of their energy sourcing form eligible and certified renewable energy resources.

Feed-in Tariff is under the provision of the RE Act, IRR & FIT Rules is a scheme

which involves the compulsion and obligation on the part of the electric power industry,

participants to source electricity from RE generation at a guaranteed fixed price

applicable for a given period of time. To encourage and support the emerging

technologies that are biomass, solar, run-of-river hydro, ocean and wind, excluding

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generation for own use and for projects, which enter into commercial operations after

implementation of the FITs. The duration for the initial FITs is 20 years, with a minimum

of 12 years. The grid system operation is responsible for Priority connection,

transmission and payment with the sole responsibility of PEMC and MGCP to

implement technical improvement and reliability of transmission.

Implementation of the FITs: - FIT rates are to be implemented by ERC through

competitive bidding as proposed by Senator Sergio Osmena, Chairman of the Senate

Committee on Energy. The Approval of FIT Rates by ERC was quiet delayed because

Renewable Energy Payment Agreement (REPA) was still being finalized and there was

delay in submission for NREB approval for endorsement to ERC. The delay

discouraged many foreign and local investors to invest in power station for renewable

energy generation. Thus, slowing the progress and growth potential of this lucrative

industry. The wait is over after consideration and updated computation with construction and

investment costs of the representative plants for these technologies, with anticipation to

the downward market trend of the costs. The motive to adopt higher capacity factors for

these plants is to ensure that most efficient plants will benefit the FIT incentive. The FIT

will be subject to review and possible readjustment, by the ERC in three years after its

implementation “or when the installation targets for each technology as set by the

Department of Energy have already been met.” The lowered FITs will cushion the

impact of implementing the FIT incentive mechanism, under the RE Act on the

electricity rates. The approved rate though is sufficient enough to attract new

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investments in renewable energy as proposed by the currents ERC Executive Director

Francis Saturnino Juan.

Mr. Juan added that the approved FIT rates would be subjected to a review and re-

adjustment by the ERC after the initial three-year implementation of these rates. The

ERC is trying to ensure a balanced view to be able to serve the needs of all

stakeholders regarding the rates. So, that all other stakeholders continue to cooperate

with everyone to be able to establish a competitive market, as well a step towards clean

renewable energy which is envisioned to benefit all the stakeholders. The ERC

regulator also mentioned “The ERC also adopted a lower equity internal rate of return of

16.44 percent in calculating for the FITs, except for biomass, which was allowed a

higher EIRR of 17 percent to account for fuel risks.” Thereby, Biomass getting the most

favorable benefit with regards to rates in comparison to other forms of renewable source

for example, winds and solar who were surprised with the declaration of low FIT than

their expectation.

Initial proposed Feed -in Tariffs (FITs) in PHP. /kWh (Source: NREB) Technology Proposed by RE Developers NREB Approved

Jun-10 Oct-10

Nov-10 Apr-10 Apr-11 Digression Rate

Biomass /1 9.84 11.48 9.94 8.22 6.63 0.5% after 2nd year Run-of-River Hydro/2 7.8 7.44 7.4 6.56 5.90 0.5% after 2nd year Solar/3 22.64 23.81 20.55 19.11 9.68 6% after 1st year Wind 11.23 11.92 11.85 11.29 8.53 0.5% after 2nd year Ocean 18.52 18.52 18.52 18.52 17.65 For Approval /1 for a solid biomass project /2 for a project with capacity between 1MW and 10MW /3 for a ground mounted project with more than 500KW capacity

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Below is the comparison of FIT rate of other ASEAN countries with comparison to

that approved in the Philippines, clearly showing the favorable benefits Biomass

is enjoying?

FIT rates of other Countries 2011 in peso

Technology Philippines (NREB-Approved)

Philippines ERC approved rates – 2012

Malaysia Thailand Germany Spain

Biomass 7 6.63 3.31 to 3.45

3.74 to 4.00 --- ---

Run of River Hydro 6.15 5.90 3.31 to

5.04 4.40 to 5.32 — —

Solar 17.95 9.68 12.23 to 18.28 13.82 19.57 to

26.35

14.09 to 26.95

Wind 10.37 8.53 --- 7.92 to 9.24 5.64 4.47

*Assuming Exchange rate of 31st July 2012/ Source: NREB

(National Renewable Energy Board)

Net Metering is under the provisions of the RE Act & IRR with the objective to

encourage end-users and new players to participate in RE generation. Moreover it is

Consumer-based RE incentive where the renewable energy power generated by the

end-user, and delivered to the local distribution grid may is used to offset electric energy

supplied by the DU to the said end-user. The law mandated the DUs to accept the

agreement to offset the electric power without hesitation or discrimination. The benefit to

the DUs here is they will be entitled to any RE certificate from the Net Metering

arrangements.

Green Energy Option is under the RE Act & IRR and is a mechanism which

shall provide end-users the option to choose, RE Resources as their source of energy.

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DOE provides the regulatory framework in consultation with NERB to establish the IRR

and ERC to issue the regulatory framework. The mandated parties here are TRANSCO

or all it’s successor-in-interest, DUs, PEMC and mandated organizations provide the

mechanism of commercial arrangements and physical connections. Thereby, informing

the end users the monthly energy consumption and generation and issuing electric bill

by the RE facilities.

Thus, for the success of the above non-fiscal incentives active support and

understanding of distribution utility RE generators is needed at the same time

capabilities and limitation, of the DU have to be understood by all stakeholders. This

requires implementation of policy, which will create closer coordination between

developers and DUs.

33.2. Fiscal Incentives: -

Summary of Incentives from renewable Energy Act 2008 Incentives RE Developers RE Commercialization 7-Year Income Tax Holiday Yes Yes Duty-free Importation Yes Yes VAT-free Importation No. Tax Credit Yes Special Realty Tax Rate <= 1.5 % Yes Net Operating Loss Carryover Yes Yes 10% Corporate Tax Rate after ITH Yes Accelerated Depreciation Yes Yes Zero Percent VAT on RE Sales & Purchases Yes Yes Cash Incentive = 50% of UC for Missionary Electrification Yes Tax Exemption on Carbon Credits Yes Tax Credit on Domestic Capital Equipment & Services Yes Yes

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Incentives RE Developers

Electricity Supplier End -users

Renewable Portfolio Standards Yes

Feed-In Tariff on Emerging Technologies Yes Yes

Renewable Energy Market & Certificates Yes

Green Energy Options Yes

Net Metering Yes Government waives share of proceeds on RE micro-scale Projects <= 100 kW Yes

Exemption from Universal Charge Yes Payment of Transmission & Wheeling Charge = Average kWh rate Yes

Tax Rebate for RE Components Yes

Financial Assistance Program Yes

Incentives for Host Communities Yes Source: NREB (National Renewable Energy Board)

RE Installation Targets in MW Capacity as of 2011

Technology Proposed by RE Developers

DOE

NREB Approved (April 2011)

DOE Certification to ERC (July 2011)

Jun-10 Nov-10

Biomass 357 416 233 250 250

Run-of-River Hydro 131 131 17

0 250 250

Solar 235 542 20 100 50

Wind 710 710 220 220 200

Ocean 10 10 10 10 10

TOTAL 1,443 1,809 653 830 760

Source: NREB (National Renewable Energy Board)

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Indicative Rate Impact of the FIT in 2014, Avoided Cost based on Average WESM Price

Technology

RE Generation (GWH.) (A)

FIT Payments (PHP. million) (B)

Avoided Cost (PHP. million) (C)

Rate Impact of the FIT (PHP. million) (B) - (C)

Rate Impact of the FIT (PHP. /KWH) (D)

Biomass 1,577 10,982 10,282 700 0.0106

Run-of-River Hydro

1,029 6,299 6,709 -410 -0.00624

Solar 70 1,112 456 656 0.001

Wind 438 4,519 2,856 1,663 0.0253

Ocean 26 464 170 294 0.0045

TOTAL 3,140 23,376 20,473 2,903 0.0442 Source: NREB (National Renewable Energy Board) Notes: - 1. Rate impact of FIT after three years of the affectivity of the FITs 2. Avoided cost based on the average WESM price of Php. 4.50 / kWh (2010)

3. Applying respective digression in the FITs

34. “Biomass” Renewable energy scope in the Philippines: -

Renewable energy sources in the Philippines are dwarfed by the size of untapped

potential. The Philippines is the world’s tenth largest producer of sugarcane creating

enough waste biomass to generate 500 MW of electricity.

The Philippines has 34% of its energy mix as renewable energy and is the highest in the

world. Though, the source of fuel in renewable energy is free there is a limitation with

control over its supply, availability and consistency. The front and effective cost is very

high in case of wind and solar, so there has to be means of utilizing other forms of

renewable fuel, which not only requires comparatively less investment, but also solves

the purpose of controlling the waste management of a country, which is hazardous for

the environment and treatment of which is added expense to the economy, for e.g.

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Industrial and agricultural waste. Thus, Biomass wastes are generated in huge volume

in developing agriculture based economy, especially in Asia. Industrial effluents and

other byproduct wastes create problems of air, water and soil pollution. Dumping and

improper disposal has serious consequences on environment. During the process of

organic decomposition of these wastes, organic matter penetrate into the ground water,

eventually runs off to surface water causing pollution, which leads to severe health

hazards and fish mortality.

These wastes have a potential of reutilization in an environment friendly way and

generate renewable energy. Many Industries in India, Latin America and China have

started using Bio-methanation Technologies. The biogas produced fuels as a useful

source of energy while the left over sludge has a great fertilizer potential. The savings in

exploitation of fossil fuel has resulted in reducing costs and thereby increasing profits.

At a bio-methanation plant installed in India, the Internal Rate of Return (IRR) has been

reported to be as high as 32 -38 %. The additional benefit is the biogas substituted for

almost 87% of the consumption of furnace oil. (Annex 1)

35. Sugar mill “waste to power” Potential: -

Recently Sugar mills have also started using their by product waste called press mud,

for the production of biogas. Press mud contains 75% organic matter and 30% total

solid content out of which 65% is volatile rich in potassium, sodium and phosphorus.

Mud press, which contains a high level of organic material and under the current

disposal practice, emits methane gas, a harmful green house forming gas and having

global warming potential of 21. It signifies that it is 21 times more lethal than carbon di

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oxide gas. A biogas yield of 165 liters of Biogas per kg, press mud (having 60%

methane) with a processing time of 35 days was observed, during monitoring of the

stabilized biogas plant in India.

As per the Department of Agriculture, the sugar industry provides direct employment to

approximately. 600,000 workers spread across 22 sugar producing provinces. About 5

million Filipinos are dependent on sugar production for their livelihood. The Sugar

Regulatory Administration (SRA) report that a little more than 78% of sugarcane,

farmers have farm size less than 5 hectares with immediate members of the family and

close relatives working as farm hands. Sugar production contributes about PHP. 69.57

billion to the National Gross Domestic Product, with value added tax (VAT) collected

from the sale of refined sugar reaching over 2.92 billion yearly.

The crop year for the Philippine sugar industry begins on the 1st week of September and

ends on the last week of August of the following year, and the milling season is around

180 days. Production as of March 2012 was recorded 18.4 million ton cane and was

expected to reach 23 million tons this crop year. The major plantation area is the island

region of Western Visayas and Mindanao, with the province of Negros Occidental

accounting for 57% of sugar cane produced. This year 2012 Philippines is expected to

produce 2.2 million metric tons of sugar this crop year.

The per capita consumption of sugar in the country is 22 kg, and demand is growing by

2.2% every year as per the survey done by University of Asia and the Pacific in 2008.

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The consumption pattern is 50% by industrial users, 32% by the household and 18% by

the institutional users. Refined white sugar account for 74%, Raw (Brown sugar) for

14% and washed sugar is 12% of the consumption mix. Philippines benefits from TRQ

(Tariff Rate Quota) agreement with the USA for export of sugar, which has allocated

13.6% of the total volume under this program. The Sugar Regulatory Administration

regulates the domestic supply. The SRA determines the market destination of all the

sugar produced on a pro-rated (percentage basis).

36. Current problems of Philippines sugar industry: -

Under AFTA the Tariff on sugar will gradually go down from the current 28% to 5% by

2015 and will encourage import of sugar at world market prices.

Thus, the industry has to take measures to gain its competitive advantage in the

international market with relation to improving efficiency, and build down cost of

production with introduction of latest technology. Produce high value products from the

sugarcane to create value addition. Develop and generate revenue and alternate

renewable electricity using the waste from the industry, moreover not only will the

industry survive the economic crisis but also to the energy security of the country.

Sugar processing is an intensive power consuming industry, around 87% of the total

energy use for sugarcane milling comes cogeneration power plant from bagasse, a

byproduct of the milling process. Sugar Industry is supporting 3 independent

manufacturing products i.e. raw-sugar, sugar-refineries and alcohol distilleries. The

sugar mill and distillery has the potential to generate electricity for the Philippines.

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Estimates of potential electric power co-generation are approximately 380 MW

nationwide. At least 60-90 MW of bagasse co-generated power is available as an

energy source currently in the Philippines. According to Philippine Sugar Millers

Association Inc. (PSMAI), 18 GWH. Of electricity was bought from DU’s last season,

which is equivalent to about 10% of their total power requirement. With rising energy

costs for fossil fuels, new efforts are required to develop and utilize biomass, waste to

energy cogeneration power plant from Philippine sugar cane industry.

37. Challenges for power co-generation in the sugar industry: -

Out-dated technology and equipment, The Technology and boilers have to be replaced

and upgrade the low-pressure boilers to medium or high-pressure boilers. The cane

purchase adoption system where the planter-miller cane sharing system is fixed at a

ration so better and fast decision can be implemented. The mill should adopt joint

venture or BOT (Built Operate Transfer) or a profit sharing scheme to mitigate risk, as

huge capital investment is needed around Pap. 35 - 40 Million to produce 1 MW of

power.

Sugar mill cane turns cane waste into energy. Truckloads of waste mud press, used to

lie in the backward dumping grounds polluting the environment which instead can be

used to generate energy and replace fossil fuel consumption due to its price and

shortage, particularly coal and oil. And after generation of power, the left over can be

further used to give it to the farmers as fertilizer for their farms. Melchor A. Layson,

CADP Inc. vice president and resident manager, said CADP has found valuable

resource in its mud press inventory which it would not have realized if not for spiraling

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price of fertilizer in the market. Today, due to high cost of chemical fertilizer and

limitation in application because of its chemical composition, around one hectare of

sugar farm using urea now costs P 9,000 at 10 bags for P900 each, but farmers will

spend only P 5,250 if they replace five bags of urea with organic fertilizer which costs

only P150 per bag.

In the sugar mills after crushing of sugarcane and extraction of juice, the left over

fibrous residual is about 30% by weight of cane, is called bagasse containing 50%

moisture and 2% SUGAR and balance as fibrous material. Bagasse is used as fuel in

boilers of the power plant in the sugar mills for cogeneration; the operation of sugar mill

and the refinery are consuming the power generated. The power generate by this used

by the mill colony and surplus, if any is sold to the DU’s in its grid for distribution. In the

sugar mill he by product Molasses is a dark brown viscous liquid obtained by

centrifuging the massecuite (A term used in sugar industry, which means sugar-

molasses mixture prior to the separation of molasses). With composition of 45% non-

crystallized, fermentable SUGAR and some sucrose which is a raw material for ethyl

alcohol, and alcohol distillery.

Another waste of the sugar industry is the Mud Press accounting for 2% of the weight of

the crushed sugarcane. About 5 million tons of Press mud is produced in Philippines

every year. Press mud contains 25% of organic carbon. And is treated as a waste in

normal cased dumped in the nearby field polluting the environment.

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38. Alcohol Distilleries In the Philippines: -

Philippines being a major producer of sugar as its agricultural product has abundant

has been supplying molasses, for the alcohol distilleries in the country. The distilleries

produce ethyl alcohol or ethanol, which is used to produce alcoholic drinks like ‘gin’

and ‘rum’. After the signing of the Biofuel Act 2006 alcohol distilleries is expected to

increase, which mandates blending of ethanol with gasoline to 10 percent compared to

5% in 2009. Originally, Philippine distilleries were setup in the sugar cane plantation

area in close vicinity to the raw material in the Visayas but currently, many of distilleries

have set up their plants in Luzon island to be near their target markets. (Annex-2)

39. Distillery waste to power: -

In the process of distillery the waste generated is called Spent wash, very toxic dark

brown liquid with high BOD (45000–100000 mg l-1) and COD (90000–210000 mg l-

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1), and emits foul pungent odor. Thus, reusing the waste for power generation will also

mitigate the compulsory government regulation, to treat the hazardous waste for proper

disposal and save money spent for its treatment.

MOLASSES WATER

DILUTER

YEAST PROPAGATION

FERMENTER FERMENTER SLUDGE

ANALYSER RECTIFIER ALCOHOL SPENT WASH SPIRIT RECEIVER

EFFLUENT TREATMENT

Biomass wastes are generated in huge volume in developing and agriculture based

economy countries especially in the Philippines. Improper disposal of wastes cause

problems of water, air and soil pollution. If the waste is discharged without any

treatment will result in discoloration and depletion of dissolved oxygen content, in the

receiving fresh water streams as a serious consequence if the decomposed organic

matter penetrates, into the ground water or mix with surface waters causing pollution,

which leads to health hazards to human and also marine mortality.

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Many Industries in India, Latin America and China have started using this technology

but not yet popular in the Philippines. The Philippines distillery units use sugarcane

molasses as a preferred raw material because of abundant availability. Philippine has

about 29 sugar mills and 14 distilleries nation wide. Alcohol is produced from molasses

by two types of fermentation processes. In the first type for one liter of alcohol

produced, about 12– 15 liters of spent wash is generated, whereas, in the 2n d type

of continuous fermentation and distillation process, only 7–8 liters of Spent wash per

liter of alcohol is produced as it uses evaporators for concentrating the effluent. The

alcohol industry in the Philippines is a matured industry, and majority of mills have the

old technology. On average every 1-liter of ethanol produced will results in 12 – 15 liters

of waste as spent wash.

With such findings, recycling distillery and sugar mill effluents into fertilizers, prompt a

strong potential for increasing cane production in the Philippines. With increased

production and with export, local sugar production also helps ease the country’s foreign

exchange requirement. Importing sugar to support local domestic consumption will

result in the dollar currency outflow from the economy and be disastrous for the

Philippines foreign exchange position. In addition, local sugar production ensures self-

sufficiency and food security for growth and stability.

40. Sugar and Alcohol Industry Facing Environmental Issues: -

The Sugar and Distillery industry worldwide, ranks as the 10th most polluting industry,

the waste from the industry is hazardous and toxic and major pollutant for air, soil and

water.

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The government and various environment safety organizations for example, Department

of Environment and Natural Resources (DENR) and under its guidance Environment

Management Bureau (EMB), have imposed many legal restriction and laws for proper

treatment and disposal of the waste byproducts which is very expensive and costly but

is a mandate and illegal to avoid.

• The industry has to comply with strict rules and regulations of the below acts if

they want to continue their operation and avoid legal and financial compensation.

• Clean Air Act (RA 8749)

• Clean Water Act (RA 9275)

• Soil Waste Management Act (RA 9003)

Thus with the current financial and economic turmoil the sugar and distillery industry,

have to shoulder additional expense which is forcing the industry to close business. This

new business opportunity to use the waste of this industry to generate power for sale to

the grid not only brings additional revenue to the industry, at the same time saves cost

from treatment of the waste and meets the social obligation, for a healthy environment

and not to mess additional profit from the sale of carbon credit certificates, which not

only makes the business sustainable but highly profitable.

41. Organization supporting and promoting the sugar and alcohol

industry: -

41.1. Sugarcane and Sugar Industry Governing Bodies: -

Sugar Regulatory Administration 1968: - The legal mandate of SRA is

incarnated in the Executive Order # 18 of May 28th 1986 introducing the SRA to

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encourage the development and growth of sugar industry through increased

participation of private sector and with the vision to provide regulatory, extension service

and R&D to promote economic viability production and sufficient supply od quality.

Philippine Sugar Millers Association: Is active participation of the

representative members of Sugarcane, Sugar Mill and Sugar refinery producers in the

Philippines to promote overall sugar industry.

41.2. Alcohol Distillery Governing Bodies: -

Center for Alcohol Research and Development Foundation: Is helping

provide R&D and consultation for the growth and development of Alcohol Distillery

industry in the Philippines.

Ethanol Producers Association of the Philippines: Is active participation of

the representative members of Ethanol producers in the Philippines to promote and

sustain ethanol industry.

The above association and organization will help and support the growth of the

industry; the industry growth is very critical for the power plant to have continuous

supply of the waste generated for their power generation. Thus more the industry

grows more will be the availability of the source of the feedstock.

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42. Market, Policies, and Technologies, Blending the Pieces

Together: -

Reliable and secure energy supply is a major concern in global in the world. The huge

demand for energy is emerging, with the massive development undergoing in the

developing economies. This has led to the emergence of a huge deficit in the supply of

the fossil leading to the ballooning of the prices. The gap is ever widening and will

eventually lead to a disastrous future. Another serious issue of pollution and waste

disposal is looming, due to the use of conventional fossil fuel. The pollution had resulted

in many natural disasters in last few decades.

Renewable energy requires huge investment but with technological advancement,

wastages are minimized and productivity improvement is mitigating the cost factor. It is

utilizing the agricultural and industrial waste for a waste for biomass, Barren landmass

for solar, unutilized river or sea current for hydro. Thereby, maximizing the utility without

damaging the nature or ecology.

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Thus, the world today needs a quick and permanent solution i.e. use of renewable

energy to above issues. It will mitigate the environmental impacts of conventional

energy production and use, achieve energy security and provide stimulus for economic

growth.

This would lead to the emergence of an entirely new opportunity thereby. This would

create a sweet spot for of opportunities, for energy developers with to provide a secure

and reliable environment friendly source of energy. This would require optimal utilization

and planning of resources in the years to come. Any unplanned and over exploitation of

the energy sources would expose the vulnerability of the resources.

43. Background on Loider Inc.: -

Mr. Srinivas Polishetty is the founder of Loider Inc. a corporation duly registered and

existing under the laws of the Philippines. Loider Inc. having registered office in Makati

city currently focuses on health care segment with annual revenues of USD300, 000. As

part of its diversification strategy, Loider is foraying into renewable energy sector in

general and biomass based RE (using waste and waste management from sugar mills,

refineries and distilleries) in particular.

Mr. Polishetty / Loider has access to USD 10 million of funds raised from international

investors to invest in RE sector which Loider will spearhead. Loider has developed

technology relationships with Innovative Environmental Technologies Limited of India

(which pioneered technology in methane capture from Mud press from sugarcane and

Spent wash from distilleries) and General Carbon Partners, which focus on carbon

credits and carbon investments.

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44. Background of the founder: -

Srinivas Polishetty, Vice President, has an MBA degree from the Asian

Institute of Management and McGill University and M. Tech. in Chemical Engineering

from the Indian Institute of Technology. Prior to founding Loider, Mr. Srinivas has

worked at AO Capital a regional PE and investment firm focusing on Asian markets.

Prior to AO Capital, he worked as a regional research analyst covering Asian utilities

sector for a major stock brokerage house and as a deputy director for a leading Indian

oil & gas firm. His experience includes corporate finance and project finance activities in

such sectors as telecommunications, media, technology, infrastructure, manufacturing,

and pharmaceuticals. Mr. Polishetty with more than 20 years experience and has

advised a number of companies in countries in Southeast Asia (Malaysia, Indonesia,

Philippines, Laos), India, China, and Hong Kong.

Loider Inc. has sensed the benefits and opportunity to exploit and enter the renewable

energy Industry in the Philippines. One such opportunity has been found in Luzon Grid

in Tarlac City. It is the nearest location to the big cities like Manila, Subic, Angeles and

Baguio etc. Tarlac is close to the highest populated cities in the Philippines where

demand and consumption of electricity is increasing faster than its supply. Moreover this

is a location, which drives the advantage of having sugarcane plantation, sugar mills,

sugar refinery and a distillery in the same location. The city itself is witnessing a surge in

demand. The local administration is more than willing to address the power situation so

as to able to improve the development of the city by developing special economic

zones, Industrialization and over all living standard and general economy of the

Philippines.

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The location throws up an opportunity for Loider Inc. to undertake the potential for

incorporating anaerobic digestion, into agro-industrial waste management systems with

an initiative to reduce methane emissions and provide a renewable source of energy.

The target company for a sustainable business partnership most likely to be Central

Azucarera de Tarlac (CAT), located in Central Luzon, CAT is an integrated sugar cane

mill and distillery producing both raw and refined sugar, alcohol, liquid carbon dioxide,

and yeast. There is potential for capturing and utilizing the methane currently being

emitted during the anaerobic stabilization, of the distillery slops generated during

ethanol production and mud press from sugar mill, dumped into the nearby empty fields.

The purpose is also to remove the Biochemical Oxygen Demand (BOD) from the

wastewater.

45. Location of Proposed Project: -

CAT is located in the Luisita Agro-Industrial Complex in San Miguel, Tarlac City, Tarlac

Province. The cane mill produces raw and refined sugar and molasses with the latter

used to produce ethanol, and has the capacity to process 1.2 million metric tons of

sugar cane annually during a processing season, that typically is from October through

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April. In the past cane harvest for 1.2 Million tons can run the mill for 11 months

working 24 hours, but for the last few years 2010 to 2012 the harvest is around 850

thousand tons, supporting mill operation for 5-6 months. The sugar refinery and the

distillery will run another 2 months i.e. operating 7-8 months in a year. The distillery has

the capacity to produce 60,000 L of ethanol per day, which translates into approximately

12.6 million liters annually assuming seven months (210 days) of operation per year.

However, both the sugar mill and the distillery have not been operating near maximum

capacity for the last several years, because of reduced sugar cane production due to

low sugar prices. The production of ethanol is highly dependent on the supply of

molasses, a byproduct that is generated from the process of the sugar mill and the

refinery. Out of the 4 columns only 3 are running in the distillery with last year’s

production of 53000 liters per day. For the year 2012 -13 the factory will start operation

24hrs starting November 6th for the sugar mill, and sugar refinery on November 13th

2012 for the distillery and the expected cane yield this year is approximately 780,000

Metric tons. The management is trying to utilize the non-operating months on tolling

basis from other private companies, to continue utilizing the 3 M’s (Man, Machine, and

Method), the 4th M i.e. material to be provided by the counterparty for a profit sharing

basis.

Semi liquid wastewaters i.e. spent wash from the mill and the distillery are maximum

flow is 900 m3 per day at the maximum ethanol production rates of 60,000 Liters per

day. The distillery slops first flow into decantation settling tanks for minimum 24 hours

and then discharged, to a series of conventional anaerobic lagoons for natural treatment

before being ultimately discharged into the cropland. The spent wash or sludge or slops

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as called in the factory from the distillery, is generated at the rate of 15 L per L of

alcohol produced. Thus, the potential maximum flow is 900 m3 per day, at the

maximum ethanol production capacity of 60,000 Liters per day. Normally the settled

solids, rich in yeast cells, are sold as animal feed.

The decantation tanks (left) and lagoons (right).

Since methane has a pungent smell and host for bacteria it has to burn, and it’s an extra

expense and work for waste management to meet the requirements of Department of

environment and natural resources (DENR).

Burning of methane being emitted from Lagoon

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46. The baseline methane emissions at CAT: -

Parameter Value

Distillery slops generation rate 150 m3 per 10,000 L of ethanol

BOD5 concentration 45 kg BOD5/m3

% Reduction of BOD5 to methane 100%

Rate of methane generation 0.35 m3 of methane per kg BOD5 destroyed

Methane (CH4) emissions 2,363 m3 of CH4 per 10,000 L of ethanol or 1,583

kg of CH4 per 10,000 L of ethanol

Mud press waste from the can mill is simply dumped in the open field, of which 30% is

picked up by a supplier from Nueva Ecija (Region III) of heavy equipment’s, to produce

fertilizer in his region, in return of sale of equipment worth Php. 6 / kg of mud press

picked. It is estimated that 10% of the can milled is mud press i.e. in a milling season of

800,000 tons of cane the mud press generated will be 80,000 tons.

CAT has an existing 9.5 MW installed capacity of cogeneration power plant, fueled from

bagasse, the current power generation from the power plant is 5.8 MW, due to the

reduced production of cane and thereby availability of bagasse. Total power

consumption of CAT is 7.4 Megawatt, and deficit 1.6 MW is being sourced from the

local grid i.e. San Miguel Power Association.

CAT has already invested heavily in anaerobic digester in 1995 which ran for 2 years,

but eventually has to be stopped for the reason being uneconomical during that period

as bunker oil was cheap, there was no support or incentive from the government for

renewable energy, the technology was new and did not take into account the problem

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from high ground water level and high risk of contamination of the underground water

reservoir resulting in political and environmental issue. This makes low cost in ground

digester option less attractive. Sugar cane distillery waste is toxic to bacteria, as has

high concentration of sulphate, H2S, low pH and as it high level of phenolic and

refectory carbon compounds. The technology of up flow anaerobic sludge blanket

(UASB) was unknown that time, and its application today with granular thermophilic

anaerobic digestion can improve and maintain the, methane producing bacteria intact

without being washed out along with discharge of waste water from the digester.

Methane bacteria and acetogenic bacteria are few of the slowest multiplying

bacteria. They double every 6-10 days under the mesophilic conditions and every 2 –

4 days under the thermophilic conditions. Everyday slops are fed into the digester,

and equal quantity of digester is discharged. Thus it is important that bacteria would

have had enough time to feed and digest upon the discharged waste. This, indicated

by the Hydraulic Residence Time (HRT), is an important parameter for digester

operation. Which was lacking in the old technology. The bacteria formed were being

thrown out without performing. The distillery slops flow rate based on maximum

ethanol production capacity is 900 m3 per day. Thus if the bacteria is not sufficient to

digest the waste and produce methane, the process of methane generation will be

inefficient, as the waste slops are to be treated fast as the storage is a big constraint

for such a huge volume. The current anaerobic digester is not covered hence it also

creates a big problem of bad odor and disturbs the surroundings.

Apart from the above, the installed digester at CAT has no meter of measurement;

thereby there was no means to measure the amount of methane generated and the

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cost benefit. The sulphate eroded the pipelines and the vessel and thus, the operation

had to be stopped after just 2 years of installation. This resulted in huge upfront

investment of company down the drain. Loider Inc. is optimistic to propose a viable

business proposition to CAT, for mutual profit. The proposed project design will prove

the viability of the business and provide confidence for the client.

47. Description of Project activity: -

Loider will review all the potential waste discharge to identify and utilize energy-laden

waste. Conversion to methane biogas via advance anaerobic digestion system Loider

Inc. will establish as a project operating company (POC) on a built, operate, and

transfer (BOT) structure. 100% of the generated biogas will utilized for electric power

to be supplied to the Grid i.e. San Miguel Power Corporation to take the advantage of

non fiscal incentives of R.E. Act 2008 for renewable portfolio std., F.I.T. scheme, net-

metering, green energy options and revenue from sale of carbon credit certificate.

2.5 MV Gas turbine Power Plant will be set up for Biomass in the premises of CAT.,

that will produce electricity without emitting environment polluting greenhouse gases

(GHG). The electricity generated by this project is expected to replace grid electricity

generated from conventional fossil fuels, thereby reducing GHG emissions of

approximately 67500 tCO2e (tons of carbon dioxide equivalent) per year. The project is

expected to have a minimum-operating lifetime of 20 years. This project is first of its

kind in the Philippines. It will provide zero GHG emission power and help to enhance

technology transfer to the other regions of the Philippines. The Locals will benefit from

employment and job opportunities during the installation phase of the plant and the

duration of its operation.

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48. Technology for the project: -

Revival of the existing anaerobic digester which CAT invested in 1995 with the outdated

technology of Activated Sludge Treatment (AST), to the latest technology of enclosed

up flow anaerobic sludge blanket (UASB) reactor, following the principle of gravity

retention of the bacteria by sedimentation. The equipped with simple gas collection

system also popular as gas solids separator (GSS) technology which will perform the

function of settling the pallets, uplifted by the biogas bubbles. The use of Thermophilic

will double the growth of the bacteria in every 2-3 days and tremendously reduce the

Hydraulic Retention Time (HRT) for maximum bacterial cell retention in the digester.

This technology will improve space loading where the bacteria in the reactor can digest

to methane, before being lost by washout from the digester. The new technology will

incorporate to develop either (a) the ability to control sulfates through pre treatment, or

(b) the proportion of developed sulfide tolerant or resistant granular bacteria from

distillery sludge from the source. Installing of meters on every stage to monitor and

record the inflow and outflow of material, gas, electricity etc. for cost estimation.

Methane biogas in the UASB will be collected under the glass-lined steel roofing of the

digester and will be directly fed to a biogas container, to prevent and control potential

odor problems.

The project, being the first proven economic power plant in the Philippines, will

contribute significantly to the country’s knowledge base in terms of biomass plant

operation. This transfer of technology, knowledge and expertise from overseas talent

will provide local staff with the necessary skills to operate the equipment.

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Up flow anaerobic sludge blanket (UASB) reactor

49. Registration approval as CDM project: -

The success and feasibility of this project depends completely on its registration and

approval from United Nations Framework convention on Climate Change (UNFCCC)

and certification from accredited international auditors, for this project to be recognized

as CDM activity. The permission and approval will provide go-ahead signal, for the

project implementation. The incentive provided by the CDM is critical factor for the

funding of the project, It was to be secured only on the condition that the project

receives CDM status and the CERs are pledged as collateral to bank debts.

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50. Identifying barriers preventing implementation of the proposed

project: -

• Debt funding is expensive for this type of project in the Philippines on a

commercial basis both from international or domestic institutions. The IRR

(Internal rate of return) of the project has to be high and attractive to gain the

confidence of the financial institution. The NPV has to be positive. Furthermore,

financial institutions see the new company in this industry credit rating of the

company as risky.

• As this technology is not popular in the Philippines, so there is a lack of skilled

labor to operate and maintain the equipment. Skilled talent from outside the

country will need to be hired initially in order to train local workers and supervise

the operation and maintenance of the plant resulting in an increase of the plant’s

operation costs.

• Financing condition for the project is developed as a CDM activity. The project

will receive financing from the commercial bank, and in case of international

finance, Philippine Export and Import Credit Agency (Phil EXIM) will act as the

loan guarantor on the condition that the project attains CDM status. International

financial institution would not have financed the project without Phil Exim’s

guarantee.

• Pledged Benefits from CER revenues will enable Phil EXIM to offset the high

project risk. Phil EXIM further stipulates that the CERs, when acquired, must be

pledged as a collateral, for loan guarantee. This shows that without the CDM, the

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project would have never reached financial closure and therefore could not be

implemented.

• Currently Philippine governmental subsidies for biomass projects have to be

efficient and needs to be improved to boost the project viability. Governmental

subsidies are a key element to promote the development of this project. Though

the government has passed few benefits and subsidy both fiscal and non-fiscal,

its monitoring and implementation needs to be improved drastically. It is to be

ensured that the concerned parties strictly follow it.

• The Philippines is prone to typhoons and earthquake as it is situated on the ring

of fire. It signals the possibility of potentially damaging or disruption, in the

operation of the Project.

51. Impact of CDM Registration: -

The approval and registration of the project as CDM will enable the project to be

undertaken, as Phil EXIM has agreed to guarantee the loan of international financial

institution. Only on condition that the project receives CDM support and the CERs are

pledged as collateral for its guarantee apart from this considering the price of CCC

(carbon credit certificate) US$ 3 per tCO2e, has a considerable impact on the project’s

IRR. CDM registration makes the investment in the project more attractive than without

the CDM incentive.

52. Analysis of environmental impacts, including trans boundary: -

The Environmental Impact Assessment (EIA) studies the adverse effect of the biomass

power generation, and needs the issuance of Environmental Clearance Certificate

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(ECC) from Philippine Department of Environment and Natural Resources (DENR). The

project has to strictly comply with the norms and guidelines of the DENR in both the (a)

Construction phase and (b) the Operation phase. The project also has to prove its

viability, as to how it is reducing the pollutant discharge of the industry (air, water and

soil). The spent wash and mud press is rich in sulphate and nitrogen and simply an air,

soil and water pollutant with strong odor and toxic chemical. The treatment for the same

is expensive, time consuming and indispensable before being discharged into nearby

water body and fields. Thus the assessment proves, that the project is not expected to

cause any large and long-term adverse effects to the environment, in fact it is protecting

the environment and the community.

The Biomass power project is considered as an infrastructure project i.e. energy and

utilities. Investment in the sector is usually long-term, requires a relatively large capital,

and involves complex and multiple contractual agreements. The most critical issue for

Loider Inc. is to strategically evaluate and design the criteria for choosing its partner, for

the pilot or the first step into this industry. Explicitly Loider wants to provide a solution to

the pollution problem; in addition it will provide source of electricity, extra cash, carbon

credit etc. Project completion and success depends upon a large extent on choosing

and involving the most reliable and performance driven partners, to enter the market for

future’s successful venture. Loider for its first proposal has chosen Central Azucarera

de Tarlac, for the reason being, they are currently facing the problem of waste

management, land reforms and competitive market. Thus, there is a sweet spot in which

a successful partnership will help CAT to resolve its problem and with the success of

the project, Loider can offer and propose the same success story of the project to the

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next location i.e. Pampanga and Batangas, and thereafter move to the highly

concentrated region of Visayas. The head office of Loider Inc. is in Makati, Luzon. With

its current local network and connections will prefer to start its first project in the island

of Luzon, before exploring to the south i.e. Visayas.

The parent Company Loider Inc. which is a Philippine based company, having access to

US$ 10 million of funds from international investors to invest in R.E. Is partnering and

associating itself with the best possible in their respective fields. For the technology,

equipment and maintenance contract Loider Inc. is partnering, with Innovative

Environmental Technologies Limited of India (IETL). IETL has been a pioneer in

technology for methane captures from mud press and spent wash and has gained

credible reputation, with successful projects in India, China and Thailand. IETL has

successfully developed a technology to remove sulphate from the waste, which can be

sold as fertilizer for organic farming and provide additional revenue stream. They are

now targeting, strong foothold in the Philippines. Mr. Polishetty has already made a visit

to one of their successfully demonstration plant in India. The implementation of the

similar technology is an attractive and defensible proposition to the Philippines market.

The project will generate electricity from a renewable source and will help reduce the

Anthropogenic GHG emissions, by displacing electricity generated by its burning fossil

fuels. These emission reductions would not occur in the absence of the proposed

project because it can only be developed as a CDM project. To help Loider Inc.be able

to obtain financing on the condition that the project attains CDM status and the CERs

are pledged as collateral, it will partner with General Carbon Partners, which specializes

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in Clean Development Mechanism (CDM), and drafting and approval of Project Design

Document (CDM-PDD) for approval from United Nations Framework convention, on

Climate Change (UNFCCC) and certification from accredited international auditors, from

of this project as CDM activity. General Carbon Partners will enter a Contractual

Purchase Agreement (CPA) for outright purchase of 100% of the carbon credit

generated for 5years, (subject to renewal for another 5 years) at prevailing market price

less 25% as their undertaking fees.

The Parent Company Loider Inc. (LI) core business is in pharmaceuticals, LI to protect

its existing core business and to create a Special Purpose Vehicle (SPV) or Special

Purpose Company (SPC) Loider Biomass Inc. (LBI) as a subsidiary with a specific

purpose of financing and acquiring the biomass power plant assets. LBI is set up legally

to avoid being affected or to cause interruption to the operations and credit worthiness

of the parent company. LBI will develop and manage the CAT biomass power project

under the BOT scheme for 12 Years as a bankruptcy-remote entity that will remain

secure even if the parent company Loider Inc. will face difficulty, during unfavorable

situation. CAT is currently exposed to political and social issues, thus a SPV will protect

this project in worst-case scenario if CAT’s operation is interrupted. Through the SPV,

Loider Inc. protect its equity and insulate itself from the exposure and benefit from Tax

consideration. LBI is highly leveraged (60% Debt) thus the cash flow generated by the

project will be used to replay debt, operational expenses, and provide return to equity

providers. The Debt Service Coverage Ratio (DSCR) will increase proportionately with

financial and investment risk exposure of LBI in the power plant project. LBI will be

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negotiating with bank for limited recourse loan. The liability will be up to the amount of

equity invested. LBI is supported by 40% equity and thus will provide improved credit

rating of the project. It will provide debt lenders confidence in the project, and allow LBI

to negotiate on the debt interest rate to reduce the weighted average cost of capital to

lowest minimum possible to generate high Internal Rate of Revenue (IRR). The target of

LBI is to complete the Loan Life way ahead of the Project Life to ensure maximum

returns to the equity investors during its 12 years Built Operate Transfer (BOT) contract.

53. Stakeholder Analysis: -

Loider Inc.: - This is the first step of Loider in the market, thus the success of the

project will encourage Loider to take up new projects as the scope in the Philippines

with relation to distillery and sugar industry is high.

Loider Biomass Inc.: - The SPV will ensure the project is not influenced by the limited

liability of neither Loider Inc. nor CAT; It will operate as a successful individual Biomass

power plant entity. The mission and vision of LBI is to provide a solution to the waste

management issue of CAT and Tarlac city, which is exposed to political and

environmental risk. In return will generate dividend for its equity shareholders.

Central Azucarera De Tarlac (CAT): - CAT currently is facing sustainability

issue because of falling sugar price in the local and international market. Waste

management is additional high cost to the mill. The project will help CAT take care of its

waste management situation and also provide additional funds to offset and balance the

loss from the price fluctuation of sugar. Thus, will help CAT cover its losses and try to

revive or sustain the business. The additional cash from the power plant will support

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CAT to improve its ethanol production by improving the mill operation. The production of

ethanol depends upon the Molasses, which is a byproduct of the sugar mill. The

Philippines is currently having a shortage of Ethanol, the country is producing less than

10% of their ethanol consumption.

Innovative Environmental Technologies Limited of India (IETL): - IIETL has

a breakthrough technology in the Biomass industry; they have an opportunity to enter

the profitable Philippines market because of the presence of distillers, most of them

facing similar problems. IETL is investing a major portion of their revenue on research

and development; the project provides multiple revenue sources for IETL. From the

project IETL expects to receive 1% of the project cost as their license fee for front-end

return on technology. Apart, from this they have equity stake in the SPV and will

undertake the maintenance and contract of the power plant for till the end of its

estimated 20 years project life. The multiple revenue streams will encourage and

motivate IETL to introduce and upgrade the technology, which will benefit of the SPV.

General Carbon Partners: - General Carbon Partners will enter a Contractual

Purchase Agreement (CPA) at prevailing market price less 25% as their undertaking

fees. Thus is developing the market for carbon trade, and as an early mover will have

the advantage to tab other renewable energy projects generating carbon credit in the

Philippines.

The Local Government Units (LGU) and the local residents regard the project

very favorably due to the anticipated economic benefits in terms of reduction in

environment pollution and improvement in employment opportunities, economic and

infrastructure development, additional tax revenues, and reduction in waste pollution.

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The improvement in the power supply in the area is also being seen as a magnet for

investors.

The Philippine Environmental Impact Statement (EIS) process requires the project

sponsor to undertake consultations with the project stakeholders especially the host

communities. The project’s EIA documents are also considered public documents under

the Philippine EIS Law and are available at the DENR. The project preparation as the

project sponsor’s foreshore lease application included the conduction of barangay-level

and municipal-level consultations, individual visits to adjacent landowners, meetings

with the provincial, municipal and barangay officials/councils, and consultations with the

plantation association in the municipality of Tarlac. The high awareness and acceptance

by the local leaders, farmers and local residents of the project have been validated by

DENR and DOE officials during its visits to the area where it had the opportunity to meet

and interview both local leaders and residents.

Land acquisition: - Land acquisition is limited to a small lot for the power plant

and control station. In fact the existing space of the digester will be renovated, upgraded

and revived. While the transmission line will utilize the existing San Miguel Grid. The

project will not entail any major land acquisition. No negative social impacts are

predicted as a consequence of the project.

Indigenous People: - A field investigation by National Commission on

Indigenous People (NCIP) confirmed that the Power Plant area is outside Indigenous

People territories.

Disruption of livelihood: - Local residents will have continued improvement in

reduction of air, soil and water pollution from the waste of CAT.

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Local employment: - Local residents will be given priority in the hiring of

employees and workers for the project. 60% of the workforce will have local hiring.

Availability of electricity: - The public, including local farmers and the

community will continue to have availability of electricity through the SM distribution

utility.

Social Development Program: - The project sponsor has indicated that it will

allocate funds and pursue social development program benefiting the host villages.

Power projects under the Philippines Energy laws, are normally required to set aside

social development and environmental enhancement funds for the host communities

from their annual revenue streams. However, renewable energy projects such as

biomass projects are exempted from these requirements (Philippine ER I-94, Section 8-

b). Even then LBI will set aside funds from the revenue from a portion of the carbon

finance generated by the proposed project for the upliftment of the local community.

54. Environmental Sustainability: Impact on Local Pollution: -

In addition to mitigate emission of CO2, the project will reduce emissions of local

pollutants particularly Sulfur Dioxide (SO2), Nitrogen Oxides (NOx) and particulates. The

toxic waste generated from CAT will be reduced. Construction impacts will be well

managed through proper environmental practices. The project does not cross or

negatively affect any populated or cultivated areas, nor areas with cultural heritage

sites. The nearest residence community is about 2 km from the proposed power plant.

The technology generates minimal noise and prevents sound pollution.

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The Project is favorable and necessary for all the stakeholders and upliftment of the

local community. Thus, the project has to be supported by the local political party for the

overall development of the region.

55. Investment and Credit Analysis: -

Loider has established reputation and goodwill in the financial market and its investors.

In the past it has never defaulted in returning the promised returns to its investors. The

network and connection is an advantage for Loider to raise equity and debt for this

project. The project has projected IRR of 33% without revenue from carbon credit sale

and IRR of 44% including revenue from the sale of carbon credit. Thus, if the project is

able to successfully sell its carbon credit there is a bonus of 10% to its equity holders. In

worst-case scenario if the company cannot sell carbon credit certificate it still has a high

IRR of 33%, making the project profitable and viable. The project is leveraged i.e. 60%

is debt. Thus the Project high IRR will help the company negotiate an attractive interest

rate with the bank. The Debt provider will of course propose superiority on the cash

waterfall. Taking into consideration he price fluctuation and cyclicality of the sugar price

the objective of the SPV is to retire debt.

Earliest possible. The advantage from the point of different view to the sponsor is Loider

can provide high return to its investors, soon after retiring its debt obligation and the

revenue from contract agreement of the right to sell generated carbon credit of the

estimated project life. CAT will enjoy the cash and equity windfall for 8 years after the

expiry of the BOT 12 years contract. Assuming project life is 20 years.

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56. Viability of the project, given cyclicality of sugar and energy

price fluctuation: -

The project is favorable and attractive for the SPV and CAT given the cyclicality of

sugar and energy prices. The price of sugar in the international market is dropping fast,

resulting in increase losses of the sugar industry of the Philippines. The additional cash

from this power project will support, CAT to sustain and operate their core business of

sugar and distillery even when incurring loss. Electricity is a major cost in the sugar mill

and the distillery. If energy price increases or decreases the biomass power project will

support to offset and balance the losses from the operation of the mill. If the market

electricity rate goes up the mill and distillery can buy the power from the power plant

directly and incase the market electricity price will go down the power plant can sell to

the grid with the fixed feed in tariff. For the SPV as long as CAT can run its operations,

there will be continuous supply of the waste raw material. The project is for mutual

benefit of both the partners.

The FIT of Biomass at Php. 6.63 per unit is lower than the market power tariff of the

Php. 10 per unit. The FIT of Biomass is lower than the other renewable energy FIT like

wind and solar. In case of adverse situation for example change in government

regulation or change in policy, the biomass power plant project, which is selling

electricity lower than the market price is not exposed to threat or sustainability. The

project will be viable and profitable even during reducing prices in the future.

57. Human Resource and Organization: -

The plant would be staffed with 17 employees i.e.10 fulltime and 7 contractual

employees. The salary will include benefits such as Social Security, Pagibig, and

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Healthcare etc. with 20 days sick leave per annum. Budget allocation for salary and

wages is 3 million pesos per annum.

Employees Status NO. Salary/month/head Annual Salary Business Manager Permanent 1 30,000.00 360,000.00 Plant Manager Permanent 1 20,000.00 240,000.00 Plant chemist Permanent 1 12,000.00 144,000.00 Electrical Supervisors Permanent 3 14,000.00 504,000.00 Mechanical Supervisor Permanent 3 14,000.00 504,000.00 I & C Supervisor Permanent 1 14,000.00 168,000.00 Electrician Contractual 1 12,000.00 144,000.00 Junior Technician Contractual 3 12,000.00 432,000.00 Accountant Contractual 1 15,000.00 180,000.00 Clerk Contractual 2 10,000.00 240,000.00 Expert for training Contractual 1 84,000.00

Total Salary Payment per annum 3,000,000.00

The plant will be running 24 hours, under 3 shift (A, B and C) of each eight hours.

Typically in a new power plant, the equipment cost includes technical and operative

training during the construction and commissioning stage. The company will request

vendors to provide training to the operation staff of the plant and include the charges in

the cost of equipment. The employee’s will be provided with a manual for the plant,

which has to be strictly followed. Employees will be given the responsibility of the

position only after passing and qualifying the training process.

The workers will have to comply with strict safety gear and norms, to avoid any casualty

or accident; anyone found negligent will be terminated or suspended immediately. The

Internal rate of return (IRR) for the project is 33% with without the computation of the

carbon credit, and additional 10% with the computation of carbon credit. At the hurdle

rate of 15%, the project has a buffer of 18% and 28% with carbon credit, to cover the

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escalating cost and unanticipated hike in salary and wages, for the project to be feasible

and sustainable

Social development program for the host villages: - The project is to be explained to

the Local Government Units (LGU) and the local residents very favorably as it will

provide the region with economic benefits in terms of improved employment

opportunities and power supply in the area. To formalize commitment to provide social

development program for the host village, the project sponsor is participating in Social

development program where Php. 850,000 are being donated every year to a provincial

school to provide education subsidy to the children of the city and Php. 650,000 every

year for supporting development of charitable hospital and healthcare, for the poor in

coordination with the local government.

The total amount of SDP i.e. 1.5 Million Philippines pesos per year will be financed from

carbon finance generated by the proposed project. The SDP document shall be

submitted to the Bank before the end of the construction activities.

58. Risk Analysis and Mitigating Factor: -

The project is exposed to major risk and some suggestion for Mitigation

Raw material Fuel for the Power Plant: The availability of the waste material i.e.

spent wash and mud press depends upon the uninterrupted operation of the Sugar Mill

and the Distillery. Hence there has to be an agreement with the management of sugar

mill and distillery to ensure continuous supply of waste, in worse case come scenario if

ever they are not able to provide from their factory, they will be liable to purchase and

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source the same from the open market. The power plant management also looks for a

reliable external source in wore case scenario of the failure for the mill and distillery fail

to support.

Construction and Engineering risk: - Delay in completion of the project is an extra

cost to the business, hence the penalty has to be imposed on the contractor and

vendor for timely completion of the project. The risk can be mitigated with the inclusion,

of the clause of liquidated damages to the turnkey contractor and vendor. In case of

engineering risk the biggest risk is with relation to defective quality supplied for which

the vendor or supplier can be penalized, and in case of obsolescence of technology,

the R&D should ensure that the technology is full proof and take into consideration the

latest invention and development to mitigate the risk.

Completion Risk: - The completion risk is associated with the operating risk. In case

of dropping sugar prices the mill and distillery may find it economic to stop the

operation. The interruption in the operation poses a threat to the power plant, as the

fuel is waste from the mill and the distillery. This particular risk can be mitigated by

guarantee supply of material from CAT, and also if there is another source of cash flow

or equity windfall to CAT to compensate for their loss from continuous operation.

Environmental and Natural Disaster: - Philippines is prone to natural disaster for

example earthquake and typhoon, hence the risk can be mitigated by comprehensive

insurance, including damage caused due to the “act of god” and also operational and

revenue loss due to shut down of the power plant.

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Political risk: The political risk is not too high in the Philippines as the power

generation sector is deregulated. The country faces interruption in operation if ever the

country will wage in a war. There is possibility of china engaging in war with the

Philippines in relation to the dispute for the spratly islands. In case of war, insurance

company can mitigate the risk with a special insurance policy.

World Bank to mitigate political risk has setup a Multilateral Investment Guarantee

Agency (MIGA) an international financial institution which offers political risk insurance

guarantees to foreign investors against non-commercial and political risk in developing

countries.

The Local politics is an important consideration of risk in this power project. The local

political risk is exposed to the local government interferences, internal politics in CAT,

the existing power groups in the region, the current issue CAT is encountering with land

reform and labor unrest.

The risk can be mitigated by means of SPV, i.e. Loider Biomass Inc. that is a separate

legal entity and cannot be affected by the downturn of CAT, which is currently exposed

to various local political risks.

Multilateral Investment Guarantee Agency (MIGA) whose mission is to encourage and

promote foreign direct investment into developing countries insures the SPV. The

purpose of this agency is to support economic growth, reduce poverty, and improve the

community and the life of the people. They are targeting the projects that create new

jobs, introduce new tax revenues, develop the infrastructure and take utilize of natural

resources through sustainable program and policies.

The project has already gained he favor of the local community and the government,

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with its mission and vision to reduce the pollution of air, soil and underground drinking

water. The project is also supporting community development through its social

development program. The project under no circumstances is directly involved in land

reform and labor unrest issues. The power generated and supplier to local SM grid will

improve the availability of electricity and encourage the economic and infrastructure

development of the region. Thus the acceptance of the project by local government and

community will mitigate the risk exposure of this Biomass project.

Foreign currency risk: - In case of power plant equipment’s are imported in foreign

currency and revenue is in form of Philippine pesos, also if debt is in foreign currency

Hedging can mitigate the risk.

Financial institution risk: - The project requires huge investment and assets as

collateral are not sufficient. The renewable energy power plant can mortgage their CSR

certificate only once it is recognized by UNFCCC and approved by the government as

eligible for carbon credit. Hence the approval from the UN as accredited renewable

energy power producer is a necessity to get loan from foreign financial institutions.

Force Majeure: - The only risk in the world, which cannot be avoided. Universally all

the contracts have this clause. The only way to mitigate this risk is a special insurance

policy for which the premium is very high. The projects will obtain commercial

insurance from the market.

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59. Viability of project during disintegration of the Industry supply

chain: -

It is critical for Loider to evaluate and understand the impact on the economics and

feasibility of the project if the 3 section of the supply chain i.e. sugar mill, sugar refinery

and the alcohol distillery is not in the same sight. The project feasibility is depending

majorly on the distillery, which will generate 2 MW., of electricity, the bonus additional

.50 MW. Are benefitting from the sugar mill waste i.e. mud press. Thus, for the

sustainability of the project the target is the alcohol distillery in the Philippines, which are

in plenty and facing similar problems and issues with relation to their waste

management. In Philippines there is currently14 major alcohol distilleries, with annual

alcohol production capacity of 297.6 Million liters. The annual spent wash generation

from the 14 distilleries is approximately 3572 Million liters, with a potential to generate

30-35 MW power.

60. Proposed Investment structure: -

Loider Inc. has drafted 3 proposals for CAT. CAT has the luxury to accept any of the 3

options, depending upon their risk appetite and profit expectancy.

• Estimated cost for the conversion of existing digester and development of the UASB

digester, and power plant is approximately 85 million Philippine pesos. Capital

expenditure is 65 million Philippine Pesos.

• Raw material i.e. Industrial waste and Land area to be provided by CAT.

• CAT will be responsible and liable for supply of spent wash and mud press for the

power plant. CAT will have to source spent wash and mud press from market at its

own cost, in case of failure to provide the material from their own production.

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60.1. Option 1: - Full Ownership of CAT: -

Under option 1, CAT will invest in and take 100% ownership of the Project. Loider Inc.

will be the turnkey contractor / Co-Developer and advisors for the Project. It will be an

Engineering, Process and Construction agreement between Loider Inc. and CAT.,

against an ERC fee of 8% of the project Investment. The project has a Positive Net

Present Value (NPV) of $139,327486.66, and Internal Rate of Return (IRR) without

revenue from carbon credit sale of 34% and with carbon credit sale of 44%. The life

expectancy of plant and machinery is 20 years with 5% scrap value at the end of the

20th year. CAT will contract with Loider Inc. for the 100% sale of their generated carbon

credit certificate, at market price for a charge of 25% of the unit price / certificate. CAT

capital structure will be 40% Equity i.e. Php. 34,000,000 and 60% Debt. i.e. Php.

51,000,000. Loider can provide consultation and project maintenance for a consultation

fee as per negotiation. Loider will assist CAT to raise Debt. Capital for a service fee i.e.

2% of the raised Debt. Capital. The asset of the power plant and the distillery will be as

Turn-Key / CDM Developer

LOIDER INC.

CAT 100%

100% Stake

Biomass Power Plant

Project

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collateral for the debt Capital. The risk and the liability of the project will be 100%

shouldered by CAT. (ANNEX # 6)

60.2. Option 2: - Joint Venture of Loader Inc., and CAT: -

Under option 2, CAT and the Loider Inc. will invest in a joint venture under a 40%

EQUITY (60% CAT - 40% LOIDER) and 60 % Debt. CAT is responsible for 60% of

Equity i.e. Php. 20,400,000 (60%of Php.34, 000,000) and Loider Inc. 40% of Equity i.e.

Php. 13,600,000 (40% of Php.34, 000,000). The debt capital is 60% i.e. 51,000,000.

Equally shouldered by both CAT and Loider. This will be the turnkey contractor / Co-

Developer and advisors for the Project. The Power plant will be managed by LOIDER

INC. and Loider as compensation for their Management Fee will enjoy the 100%

revenue from sale of Carbon credit certificate. The project has a Positive NPV of Php.

130,139,751 And IRR without revenue from carbon credit at 33% and with sale of


LOIDER INC. 40 %

CAT

60 % Stake

Biomass Power Plant

Project

SPV LOIDER BIOMASS INC.

40 %

100% ownership CAT after 12 Years

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carbon credit at 44%. Both CAT and Loider equally share the risk and liability of the

project. . (ANNEX # 7)

60.3. Option 3: - BOT (Built, operate, transfer) Loader Inc.: -

Under option 3, Loider Inc. and its investment partners will set up a Special Purpose

Vehicle Loider Biomass Inc. on a build-operate-transfer (BOT) basis. 100% of the

biogas generated will be utilized for electric power generation to be supplied to the

nearest San Migue grid. CAT and the SPV will negotiate and prepare a long-term

contract with below mentioned conditions.

Loider Inc. will invest 100% upfront cost for the conversion and development of the

anaerobic digester and power plant. The estimated investment for the project is

approximately 85 million Philippine pesos. And will be 100% responsible and liable for

the project risk.


LOIDER INC. Investment Partners.

BOT (Built, operate,

transfer.) 12 Years

CAT 100%

Ownership after 12 years BOT Contract

100% Stake

Biomass Power Plant

Project

SPV LOIDER BIOMASS INC.

BOT CONTRACT

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This will be a guaranteed Supply Contract (GSC), where CAT will provide Land for the

power plant, accommodation land of employees and guaranteed 100% waste material

from the factory i.e. spent was and mud press. Failure to provide will result in penalty to

CAT, to either source the waste material from the market, or pay the amortized bank

debt, bank loan interest, and equity holder’s cost of money. Assets of the power plant

will be provided as collateral for the bank loan. BOT contract will be 12 years. The target

and objective of the project is to retile the loan, and finish the debt obligation within 6

years i.e. half of the BOT contract period for the equity holders to enjoy the windfall gain

for their investment and a better rate debt interest rate and terms can be negotiated with

the debt lenders for the feasibility of the project and high return to the investors.

Loider Biomass Inc. will pay the CAT opportunity cost of the raw material i.e. Currently

CAT is selling 30% of the Mud press waste to one of its supplier of heavy equipment’s,

a company from Nueva Elijah at Php. 6 / KG. The company is not paying in cash but

paying in form of selling or lending its heavy equipment’s to CAT. The balance 70% of

the mud press is dumped in the backyard as waste, polluting soil, air and underground

water reserve. Loider is willing to pay CAT 50 centavos/kg to buy the balance 70% of

mud press, which is an extra expense for CAT to deal with waste management and the

stringent norms of DENR.

The project has a positive NPV of Php. 134,857,711.50 without carbon credit revenue,

and Php. 173,696,598.10 with carbon credit revenue. The IRR from the project is 34%

without carbon credit and 45% with carbon credit.

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Loider is shouldering the 100% risk of the investment; Moreover there is a clause that

thus the cash flow of the initial 6 years will be used first to payoff the obligation of

investment and cost of capital. The cost of investment and capital from 2014 – 2019 is

Php. 181,900,000, which will be paid against the cash flow from year 2014 – 2019 of

Php. 182,874,301.57. The excess profit of the 6th year i.e. 2019 of Php 974,301.57 will

be shared between CAT (60%) and LOIDER (40%). In The Year 2019 to 2025, the profit

will shared as CAT (60%) and LOIDER (40%). Loider is entitled to the revenue from

sale of 100% carbon credit from year 2014 – 2025. The computation of cost of capital

for Loider i.e. Weighted Average Cost of Capital (WACC) is computed at 19% (30% cost

of equity, and 11% cost of Debt). Only after the full and final settlement of the bank loan

with the interest, the company will start distributing and sharing profits.

Loader will operate, own and manage the facility for 12 years and after the contract

expires it will be transferred to CAT management. The renewal of the contract will be at

the discretion of CAT and final negotiation and agreement with Loider. LBI will be clean

development mechanism (CDM) Co-Developer and advisory of the project registered

under the UNFCCC with lifetime right to sell 100% carbon credit certificate even after

the, expiry of the 12 year BOT for a service fee of 25% of the unit sale price, of the

prevailing rate of carbon credit in the international market. . (ANNEX # 8)

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61. Recommendation & Suggestion: -

The proposals proposed by Loider to CAT has to be drafted in the way, it is real and

practical. The alternative has a chance of winning but may lose out in consideration for

certain criteria. The draft proposal has to attract CAT to gain confidence in the company

and its project.

Loider Inc. will draft a standard proposal with the intention to approach other potential

partners in the Philippines. It is crucial for Loider to draft a standard proposal so that

clients don’t have the impression of differentiation and preference. The selection criteria

of the client, from the standard proposal will depend on clients risk appetite and

exposure.

In Option 1 CAT in the past has already invested in the Digester in 1995, but since it is

not their core business and requires profession services the power plant and the

project was stopped after 2 years of operation. CAT had lost all their investment, hence

it will not be advisable for CAT to own and operate 100% the project and concentrate

its finance and resource to the existing business of Sugar mill, Sugar Refinery, Distillery

and the existing Bagasse fed Power Plant.

In Option 2 the Joint Venture is 2nd best alternate for beneficial for both CAT and

Loider. Here since both have financial exposure and risk, it is advisable to CAT that

they try to avoid the financial risk and can use same funds in their current operation.

The Joint venture may also result in clash of interest and decision between the two

companies and resulting in the project failure. The power plant is anyhow being

transferred to CAT after 12 years thus it makes les feasibility for CAT to invest any

amount and take any project risk. CAT can invest the time and money to upgrade their

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existing factory and invest in new technology for sugar mill and distillery to ensure

improved efficiency and economies to be competitive in the industry. It will be a wise

decision if CAT can invest the 60% of Equity i.e. Php. 20,400,000.00 in their existing

sugar mill and distillery rather than investing and risking the new biomass project.

The option 3 is not most viable and best possible choice for both CAT and Loider. CAT

is not exposed to investment and financial risk. They can concentrate on investment

and development of their Sugar mill and distillery and can start receiving profit without

any risk or investment, after Loider will payoff all the investment & capital for the

project, starting 6th i.e. 2019. CAT also is benefiting from the cash revenue which

otherwise is lost opportunity cost of the waste 70% mud press which otherwise will be

wasted and incurs extra cost for treatment. In the past CAT has invested in the similar

technology and has lost their money, thus it makes sense not to repeat the mistake. It

is advisable for CAT to concentrate on their core business i.e. distillery and sugar to

ensure the continuous supply of ray material for the Biomass co-generation power plant

of spent wash and mud press. This project is just additional profit for the company

without any financial and operational risk. It also will take care of their waste

management problem as per DENR regulations.

As for Loider, they have the expertise to raise investment to fund such project. They

have the advantage to appoint on best effort basis BOT investor and contractor that will

undertake the project. Loider has partnership with leading firms in the Biomass industry

that can constantly provide and upgrade technology, efficiency and productivity.

Loiders knowledge and experience in the carbon credit market will ensure the project

receives its registration with UNFCCC at the earliest possible time to gain from the

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advantages of Renewable Energy Act of 2008 and en-cash from the sale of its

generated carbon credit certificates. Loider is benefiting from the agreement where

CAT will take liability and responsibility for the supply of the spent wash and mud press

i.e. the raw material for the Biomass plant. The condition of the BOT contract where

Loider recovering its investment and cost of capital, will start distributing and sharing

profit and turn over the project to CAT after 12 years provides extra support and

cushioning to Loider to mitigate its financial risk. The positive NPV and IRR of 45%

including carbon credit sales is an opportunity for Loider to invest in the project and

take the risk. The IRR will attract investors and will convince banks to fund the project.

Loider with its partners will ensure that efficiency is maintained to the maximum, at

every level of commissioning and operation. They will try their best to avoid any

wastage to maximize profits, to ensure the investment is out at the earliest possible

time.

Since both parties will agree to start distributing profit only after settlement of Debt, its

interest and the cost involved with raising equity and debt. They will be motivation to

maximize efficiency to ensure profits can be distributed at the earliest, because loider

will have a 12 years contract will have to maximize its return in that time frame.

With relation to CSR program which the company will initiate to serve the community

and society being funded from the revenue from carbon credit certificate, will help loider

Inc. get the approval from the respective authority at the earliest possible and thereby

enjoy the benefits of renewable energy act of 2008.

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62. Company Mission Post Biomass Power Project Setup: -

Press mud, when mixed with spent wash and after removal of the methane gas rich in

Nitrogen, Phosphorous and Potassium, produces high quality bio-manure or organic

manure. This product is gaining popularity at the expense of high cost and high content

chemical fertilizers. The process also helps in utilizing the residual slops after bio-meth

nation.

Loider is also looking for an opportunity to sell the organic fertilizer to sugarcane

planters at subsidized rates to improve the cane production in near future. This will

improve the economic conditions of the farming community and help overall growth and

socio-economic development of the rural area. The farmers living in areas surrounding

the factory, and the local community and society will have overall upliftment. The

Company has Technology and quality driven focus To produce high-grade products in

the most efficient and productive way. The company is employee centric to provide

ample opportunities to the employees for their knowledge acquisition and career growth.

The company plans to provide maximum stakeholder value by encouraging

environment friendly approach to operate the plants, to strictly abiding by the safety and

regulatory requirements, and imparting environmental concern and awareness to all the

village people and staff. Moreover Loider Inc. will be operating with the intention to

provide maximum value creation to all its stakeholders

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63. S.W.O.T. Analysis: -

SWOT

Strengths: 1. Loider Inc is Philippines based company. 2. Partnership, network and connection with Major Investment Banking and Infrastructure company. 3. Expertise in the electricity industry and renewable industry as financial consultant 4. Connections with the International Carbon Credit Trading Organisation. 5. Cash Rich company willing to invest in new technology. Availabe source and expertise in raising equity and dept for projects.

weaknesses:

1. Centralised structure in organisation 2.No on ground experience of electricity industry generation. 3.No trained and skilled employees for BioMass production. Needs to hire talent and expertise from International market.

Opportunities: 1. Electricity demand continuously rising. 2. Feed in tariff to announced at Php. 6.63/KW by government for protection of Renewable energy which is one of higheast in Asia. 3..Growth opportunities in rural market is huge in off grid areas 4. Industrial growth in Philippines 22.3 % percent per annum. 5. Bio Mass RE energy specially in wate to power in spent was and mud press, which is still unexplored in Philippines 6. Sugar and distillery industry facing financial problem from waste treatment of the spent wash and mud press, making them a loss making industry.

S-O 1. Present Government support for Philippines based companies who are making investment renewable energy [S1/2/3-O1/2/4] 2. Strategically can acquire competitors to penetrate new market AND eliminate and serve the growing domestic market [S6-O3/4] 3. Can have bilateral agreement with specific industry of Philippines to meet the growing power needs{o1/4/5-S3/4}

W-O 1. Decentralisation & high employee training will lead to faster ‘go to market ‘to tap the bigger and future opportunities [W1/3-O1/2/3/4] 2. Bio mass will be a first mover advantage in they can get and use the right resources for RE -biomass[W2/3/4O- 3/4]

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Threats:

1. Conventional energy

production cost is cheaper

especially coal.

2. Unable to introduce new

technologies.

3.Goverment regulations

supporting other RE sources.

4. Unstable source of Feed

stock.

5.Provincial governments

intervention and its own

regulations in RE project.

S-T

1. Invest in R& D and merge or

acquire with Energy companies

to get new technology and enter

market [S3/6-T2]

2.Partner with power generation

house to fulfil Renewable energy

Portfolio as per government

energy policies[S-1/3 T-1/3]

W-T

1. Pass on the benefits to

distribution companies in terms

of price due to advantage of

economies of scale and a rate

lower that feed in tariff[W1/2/3-

T2/3/4]

2. With increased government

regulations and company with

ISO and government approved

standard can take the benefit

of Feed in tariff when trading

electricity in spot market.

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64. Porter’s Five Forces – Biomass Energy Developer: -

Bargaining Power of Buyer (Low)

Increasing demand for Power and approved Feed in Tariff imposed by the DOE.

The Renewable enrgy portfolio standard and Net Metering regulation of

Renewable Energy Act 2008, provides a ready market.

Threat of New Entrants (Low)

The initial investment is high around 85 Million Pesos for Generation of 2.5 MW

Power Plants. Highly government regulated market (All Renewable Energy

power plant to be Registered with the government for the Benefits). It demands

high technical expertise, and comparatively longer return on investment.

Bargaining Power of Buyer

LOW

Competitive Rivalry

Medium

Bargaining Power of Suppliers

Low

Threat of New Entrants

LOW

Threat of New Substitutes

Medium

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Entry Barrier Analysis

• Investment Barrier: - The current investment barrier is high. The installation,

operation and maintenance of the anaerobic digester are not within the

company’s core business and not yet mandatory by the Law. It will require huge

up-front capital investment. Thus, it is not feasible for mill to invest, on their own

in the power plant. In fact they can use their investment to upgrade their

machinery, and buy raw material in which they can generate bigger profits and

sustain their business during sugar price fluctuation.

• Technological Barriers: - The technology is comparatively new and not yet

widely implemented in the distilleries of the Philippines. The limiting factors are

insufficient information, huge capital investment, high operational risk, trained

manpower, and any neglect or mishandling in accident or even suspension of the

operation, The technolgy is fast changing and IETL is investing heavily on the

R&D to continuously improve the efficiency, and introduce state of art technology

for improved performance for sustainibility, since they have the expertise ,

technology and maintainence partnership will help CAT to constantly upgrade

their technology to improve their efficiency and profitability, Thus it is a better

idea for the sugar and distillery mills to currently to facilitate, Joint venture of BOT

agreement.

Bargaining power of Supplier (Low)

Large supplier base for raw material as there many sugar mill, sugar refinery and

distillery in the country, facing similar issue with their waste management

disposal process. The raw material requires waste treatment thus it is useful to

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the sugar mill and the distillery, that the hazardous waste is disposed without any

cost to the company. The raw materials cannot be sold in open market and

transportation cost will be expensive.

Threat Of Substitutes (High)

The other major source of renewable energy, for example wind, solar and where

the Feed In Tariff is comparatively high because of the high cost of the

technology, maintenance and investment. The new technology for Solar and

wind may improve productivity at comparatively lower cost and become a threat

to biomass in near future. The conventional sources of energy for example coal,

crude, diesel etc. are cheap in price but souring the raw material in future may be

a constraint. The negative environmental impact of using conventional source of

energy is high. Hydro and geothermal are also conventional and renewable

source of electricity, have the least negative impact on the environment and

relatively low cost and pose a high threat of substitute for the Biomass project.

The county is recently experiencing major foreign investment in the power sector

and poses a high treat of substitutes. The Proposed FIT is encouraging other

renewable energy plants and thereby increasing the threat of substitute.

Rivalry (Medium) Though this particular project is a blue ocean, as there is no one else currently

using spent wash and mud press waste from, biomass generation power plans in

the Philippines. The government support to new foreign investment in renewable

energy and conventional source of power from the grid is posing a serious threat

as rivalry.

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65. Annexures: -

Annex 1: - PHILIPPINE SUGAR STATISTICS Crop Year 2011-2012

LEGAL BASIS OF SRA EXECUTIVE ORDER NO. 18 NO. OF SUGAR CENTRALS MILLING * 29 TOTAL MILLING CAPACITY 135,792 MT Canes/Day AVERAGE MILLING CAPACITY 7,988 MT Canes/Day NO. OF OPERATING SUGAR REFINERIES * 12 AVERAGE REFINING CAPACITY 13,018 LKG. Sugar/Day SUGARCANE AREAS

No. Of Hectares

CY 2008-2009 392,567 CY 2009-2010 387,519 CY 2010-2011 395,381 CY 2011-2012 ** 420,752 SUGARCANE MILLED CY 2008-2009

Metric Tons Cane 21,611,068

CY 2009-2010 19,227,028 CY 2010-2011 25,930,271 CY 2011-2012 * 22,447,192 RAW SUGAR PRODUCTION

Metric Tons Raw Sugar

CY 2008-2009 2,100,048 CY 2009-2010 1,970,785 CY 2010-2011 2,399,116 CY 2011-2012 * 2,113,033

REFINED SUGAR PRODUCTION

Metric Tons Refined Sugar

CY 2008-2009 948,877 CY 2009-2010 984,203 CY 2010-2011 823,827 CY 2011-2012 * 828,019 DOMESTIC WITHDRAWALS

Metric Tons Raw Sugar

CY 2008-2009 1,831,472 CY 2009-2010 1,943,443 CY 2010-2011 1,716,505 CY 2011-2012 * 1,338,328

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QUOTA TO THE U.S. (Quota Year)

MTCW

Equivalent MTRV

QY 2008-2009 137,353 142,160 QY 2009-2010 170,958 142,160 + 11,706 + 24,571 = 178,437 QY 2010-2011 QY 2011-2012 *

203,602 138,827

142,160 + 60,000 + 19,650 = 221,810 144,901

EXPORT SHIPMENTS U.S.

(MTCW) FOB VALUE (U.S. $)

World Market (MTCW)

FOB VALUE (U.S. $)

QY 2007-2008 125,200 31,222,685.28 14,351.75 5,595,161.72 QY 2008-2009 137,343 48,443,462.43 69,785.91 18,971,284.11 QY 2009-2010 170,957 77,485,053.58 21,060.00 5,689,397.90 QY 2010-2011 212,505 141,427,631.41 35,801.93 QY 2011-2012* 138,827 330,859.45 * As of April 29, 2012- Sugar Production Bulletin for CY 2011-2012 ** Data based on Final Crop Estimates from RDE Source: Regulation Department Prepared by: Planning & Policy Department Annex # 2, Directory Of Sugar Refinery (Crop Year 2011 – 2012) REFINERY LUZON

REGION

WAREHOUSE CAPACITY (IN LKG)

1) Universal Robina Corp- CARASUMCO II 180,000 2) Luisita Sugar Refinery Tarlac II 108,500 3) Central Azucarera de Don PedroInc IV 322,920 NEGROS 1) Central Azucare de Bais, Inc. VII 410,000 2) First Farmers Holding Corp. VI 500,000 3) Lopez Sugar Corp. VI 80,000 4) Universal Robina Corp.- SONEDCO VI 300,000 5) Universal Robina Corp-URSUMCO VII 100,000 6) Victorias Milling Company VI 290,000 CENTRAL & EAST VISAYAS 1) Hideco Sugar Milling Co, Inc. VII 520,000 MINDANAO 1) Busco Sugar Milling Co, Inc. X 2,000,000 2) Davao Sugar Central Co, Inc. XI 300,000

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Annex # 3, Directory of Sugar Refineries (Crop Year 2011-2012)

MILL DISTRICT Planter-Miller Sharing REGION RATED CAPACITY (TCD)

LUZON 38,160 1) Universal Robina Corp- CARSUMCO 60/40 II 3,660 2) Sweet Crystals SanFernando 65/35 III 3,500 3) Sweet Crystals Integrated Sugar Mill Corp. 65/35 III 2,500 4) Central Azucarera de Tarlac. 67.5/31.5 1-CATPA III 7,000 5) Batanagas Sugar Central, Inc. 65/35 IV 5,500 6) Central Azucarera Don Pedro Inc. 65/35 IV 13,000 7) PENSUMIL, Inc. Mill 60/40 V 3,000 NEGROS 100,132 1) Central Azucarera De Bais, Inc. 67/33 VII 8,500 2) Binalbagan-Isabela Sugar Co, Inc., 66.33/30.67 Assoc/3-labor

VI 14,000

3) First Farmers Holding Corp, 70/30 VI 4,432 4) Hawaiian-Phil.Co 68/32 VI 7,500 5) Herminio Teves & Co, Inc. 68/32. VII 3,000 6) Central Azucarera de la Carlota, Inc. 65/35 VI 18,000 7) Lopez Sugar Corp 70/30 VI 7,000 8) Universal Robina Corp- URSUMCO 67/33 VII 8,000 9) Sagay Central Inc. 70/30 VI 4,200 10) Universal Robina Corp- SONEDCO 70/30 VI 10,000 11) Victorias Milling Company, Inc. 69.5/30.5 VI 15,000 12) OPTION MPC 70/30 VI 500 CENTRAL & EAST. VISAYAS 10,000 1) Bogo-Medellin Milling Co, Inc. 64.5/33.5 2-Medical ctr. VII 3,000

2) R.D Durano III and Co, Inc.65 VII 2,000 3) Hideco Sugar Milling Co, Inc. 66/34 VII 5,000 PANAY 17,000 1) Capiz Sugar Central, Inc. 65/35 VI 4,500 2) Universal Robina Corp. Passi I. 65/35 VI 4,500 3) Central Azucarera de San Antonio 65/35 VI 8,000 MINDANAO 36,000 1) Busco Sugar Milling Co. Inc. 64/36 X 18,000 2) Crystal Sugar Co. Inc. 60/40 X 9,000 3) Davao Sugar Central Co., Inc. 60/40 XI 5,000 4) Cotabato Sugar Central Co., Inc. 62/38 XII 4,000

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Annex # 4, Location and Production Capacities of Distilleries In The Philippines June 2012.

Region Distillery Alcohol Production Estimated Spent wash

Million(liters/year) Million (liters/year)

I (Ilocos) Alko Distillers, Inc. 2.1 25.2 III (Central Luzon) Central Azucarera de Tarlac 18 216

Far East Alcohol Corp. 03 36

IV (Southern Tagalog) Absolute Chemicals, Inc. 12 144 (Tanduay Distillery)

Balayan Distillery 22 264 Consolidated Distillers 7.5 90 Of the Far East Dyzum Distillery 15 180

VI (Western Visayas) Asian Alcohol Corporation 45 540

Destilleria Bago, Inc. 90 1080 Kooll Distillery 12 144

VII (Central Visayas) International Pharmacy. 06 72 VIII (Eastern Visayas) Leyte Agri-Corp. Ormoc 11 132

San Carlos Bioenergy Inc. 30 360 Roxol Bioenergy Corp. 24 288

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Annex # 5, Major Players in the Philippines power industry

Corporation Subsidiaries in Power/Power Total Filipino owners

Foreign Partners

SMPC San Miguel Energy Corp. (Limay Combined-Cycle, San Roque hydro; contracted: Sual Coal, Ilijan Combined Cycle)

3,165 MW

Mr. RamonAng Mr.Danding Cojuangco,

Lopez Group (First Philippine Holdings Corporation, FPHC)

Southern Negros Geothermal, San Lorenzo Combined Cycle, Bacon-Manito Geothermal, Bukidnon Hydroelectric, Mindanao Geothermal) Leyte Geothermal, Northern Negros Geothermal, Pantabangan- Masiway Hydro, Sta. Rita Combined Cycle, First Gen Corporation (Bauang Power Corp.),

2,832 MW

Lopez Group BG Group (BGL)

Aboitiz Group (Aboitiz Equity Ventures)

Aboitiz Power, Inc. (Ambuklao- Binga Hydro, Bakun Hydro, Power Barge Mobile 1 and, 2 Thermal, Benguet Hydro, Magat Hydro, Hedcor Sibulan, Makban Geothermal, Pagbilao, Tiwi Geothermal, Mactan Coal, Cebu Coal, MindanaoToledo Coal, Coal, AP Renewables, Davao Hydro, Sibulan, Bukidnon Hydro, Davao Thermal, Cotabato Thermal, General Santos Thermal, Zamboanga Thermal.

2,051 MW

Aboitiz Group SN Power AS (Norway), Pacific Hydro Limited (Australia)

Kepco-SPC KEPCO Ilijan Corporation (KEILCO)/KEPCO Philippines Corporation (KEPHILCO) - Malaya, Ilijan, Naga, Cebu CFBC

1,263 MW

Salcon Power Corp

Kepco Philippines Corp (Korea)

Team Energy Corp (Mirant)

Sual, Pagbilao, Ilijan 2,175 MW

Tokyo Electric Power Company and Marubeni Corporation

MPPCL Masinloc Power Partners Co. Ltd. 600 MW AES Corporation (USA)

SEM Calaca SEM-Calaca Power Corp 600 MW DMCI and Coyiuto Group

Global Business Power Corporation (GBPC)

Panay Power Corporation (PPC), Inc. and Toledo Cebu International Trading Resources Corporation (TCITRC), GBP Power Resources, Toledo Power Company (TPC).

610 MW Metro bank Group (Mr. George Ty)

Biomass Energy Management research report for Loider Inc

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