SMC terminates 1,800-MW supply contracts with Meralco

Longer power crisis to distress Luzon grid


At a glance

    The energy subsidiaries of diversified conglomerate San Miguel Corporation (SMC) have terminated two power supply agreements (PSAs) with utility giant Manila Electric Company (Meralco), crashing hopes of at least 1,800 megawatts in critical power capacity additions by next year until 2025.

    In an official statement to the media, Meralco affirmed that the notice of termination had already been lodged by SMC’s Excellent Energy Resources Inc. (EERI) for the 1,200MW of gas-generated capacity due for delivery in December 2024. Also terminated is the 600MW from Masinloc Power Partners Co. Ltd. that had been scheduled for commercial operations date (COD) in May 2025.

    It was conveyed by highly-placed sources that the PSA termination was resorted to by SMC because the Energy Regulatory Commission (ERC) failed to act on its PSA applications, despite the two years that these have been pending with the agency. The joint PSA applications were filed in March 2021.

    As explained, the "longstop date" of the PSAs already lapsed, hence, there was already a legal leeway for the power suppliers to opt for contract termination without penalties.

    Longstop date would refer to established practice in business wherein the parties agree on a timeframe in which all the conditions precedent for a transaction shall be fulfilled or completed.

    According to ERC Chairperson Monalisa C. Dimalanta, the filing of the PSA applications in March 2021, hearings were already completed as of June 2021, but she is still checking “if the parties filed any motion to resolve since then.”

    With the termination of the supply contracts, Meralco stated that it is “currently studying our available options, including the possibility of requesting DOE (Department of Energy) approval to conduct another round of CSP (competitive selection process) for the 1,800MW replacement of Meralco starting 2024.”

    Typically, the gestation period of power plant developments – primarily for gas and coal – will take four to five years, hence, the leeway for Meralco will just be several months to a year from now – even if the CSP will be approved immediately by the energy department.

    The CSP policy is an auction process that the distribution utilities are mandated to carry out when they underwrite PSAs with power suppliers. The winning bidder will be the generation company that has the ‘least cost’ offer.

    As noted by industry experts, the only off-the-shelf replacement that can be done for more than a year or less will be solar plus battery energy storage system (BESS) and oil-fired power plants.

    Experts added that the warranted replacement for the terminated PSAs of 1,800MW will be more than 9,000MW of solar plus energy storage, but that will gobble up massive land resources, that in turn, will compromise the country’s food security agenda.

    If the recourse will be diesel or bunker C-fired power plants, then the government will need to bid goodbye to its energy transition agenda, because that will worsen the carbon dioxide (CO2) emissions of the country.

    Industry experts further stated that the other fallback for government is to invoke Section 71, or the "emergency crisis" provision of the Electric Power Industry Reform Act (EPIRA); and it will be the State to take on immediate capacity addition to avert any ‘worst case scenario’ of blackouts, primarily in Luzon which is the country’s main economic center.

    That particular provision in the law stipulated that “upon the determination by the President of the Philippines of an imminent shortage of the supply of electricity, Congress may authorize through a joint resolution, the establishment of additional generating capacity under such terms and conditions as it may approve.”

    And in case the two plans of SMC will still push through on  their developments, selling their capacity via the Wholesale Electricity Spot Market (WESM) will be expensive.