Gas and Coal Economics

The arguments against Energy World have shifted over time from . . .

• “there is fraud” (which was clearly wrong), to
• “building without a connection is crazy” (it is unlikely Energy World built without some comfort, but in any case, it looks like the authorities are dealing with this).

Now, the latest challenge to Energy World’s viability seems to be . . .

• “the economics of gas are bad” i.e. gas doesn’t work vs coal (Skeoch).

I focus on the fundamentals, but rather than give a narrow view of industry dynamics, I will provide broader commentary based on my view of the workings of the market and the dynamics of the industry . . .

1. The Lautau Group presentation (provided by Skeoch 9^th Nov), gives a prediction of wholesale electricity prices based on the “status quo” and a view of when a new CCGT can come in. The site has many presentations and their views tend to reflect WESM prices at the time (which hasn’t necessary been a good predictor of the future). Not too long ago I have seen presentations where the Lautau group had $80+ USD per MWh (real prices). The interesting thing about wholesale electricity markets is “status quo” is likely to be wrong.
2. I assume the “status quo” implies the Paris Accord (COP21 on slide 15) won’t be met therefore “status quo” assumes the Philippines (through their government) will choose to live in smog and watch their health and their children’s health suffer (we’re not even talking about climate change). History and coal consumption data over time across multiple geographies would suggest this is highly unlikely to be the future.
3. I’m not sure what “status quo” assumes for the expiry of the Malampaya gas contracts. But with 2700 MW of capacity or 13% of Philippines generation capacity at risk it’ll be interesting to see how the WESM electricity prices react to either capacity reduction or cost recovery on infrastructure required to avoid 2700MW of CCGT being stranded. The last presentation I saw had the cost for the LNG terminal at Batangas costing $2billion USD to build (my usual rule of thumb double the cost and time has worked wonderfully well for all LNG projects). https://www.doe.gov.ph/sites/defaul...pment_plans_emerging_natural_gas_industry.pdf. Note a 10% EBITDA return on $2b would require approximately $10 USD per MWh if you spread it over the 2700 MW as base load. That is before other input costs e.g. transport, gas, etc. Compare that with what Energy World has built and you would have to say that a lot of economic value has been created that is not reflected in the share price or there is something about the Philippines market structure that is preferring high cost assets with negative externalities.
4. I’d be interested to know what the “status quo” assumption for MWh per capita usage is and GDP growth assumptions. Per capita usage is very low in Philippines, again if one looks across different geographies and history, per capita usage will highly likely increase in the Philippines. Slight changes in this ratio can have a big impact on demand requirements.

All these can have a very large upward impact on the WESM electricity price given the inelastic nature of the electricity supply and demand. Any combination of these points happening could materially affect pricing and benefit Energy World. These possibilities are called option value. Energy World therefore has significant option value embedded in its business model making it worth considerably more than basing fundamental value on static data.

1. Skeoch provided some interesting coal and gas plant economics. The EW CCGT (Combined Cycle Gas Turbine) in Philippines is the Siemens SGT6-5000F. The heat rate for the initial 200MW what Skeoch refers to as OCGT (open cycle gas turbine) has a heat rate of 8970 Btu/kWh or 38% efficiency. Once the full 650 MW is installed it becomes a CCGT and the heat rate drops to 5965 Btu/kWh or 57% efficiency. To work out the short run marginal cost multiply the heat rate by the cost of the gas/lng delivered to the plant, then divide by 1000. g. If the delivered LNG price to the power station is $7 per MMBTU then the marginal cost is 8.97x7=$62.79 per MWh or 6.28 cents per kWh for the first 200MW. This falls to $41.76 per MWh or 4.18 cents per kWh once the 650 MW plant is completed (5.965x7). Most coal plants have a heat rate marginally above 10,000 Btu/kWh or 33%-34% efficiency. At $85 for a ton of coal assuming 19.5 MMBTU per ton implies a short run marginal cost for coal plants of $43.59 per MWh or 4.35 cents per kWh. From these calculations this makes LNG and coal relatively competitive without taking into account of the negative coal externalities. Currently the WESM market pricing does not allow for a recovery of capital cost even for coal plants. If this persists then nobody should be providing capital for power plants, coal or otherwise.

Skeoch, although it is great to see some fundamental analysis in the posts they do only provide a narrow view of the industry. In addition it does not consider the potential value of an integrated model that Energy World is developing. Given this narrow focus, the timing of your postings and your sentiment I wonder whether you are part of the short-selling group. Doesn’t make a lot of sense being a seller without stock to sell?

In summary I believe Energy World has created significant value and is many years ahead of its competitors in the Philippines. I also agree that the recent share price fall is much more about short term liquidity (being taken out of the index at the end of November) and actions by the short-sellers, than a reflection of lack of progress in the business.