Weak peso seen adding uncertainty to bidding for power contracts

LONG-TERM weakness in the peso will have an impact on power supply contracts, which tend to require fixed-price bids for terms of 15 years or so, an industry official said.

“For investors like ourselves, it’s also quite challenging because right now, when you participate in a competitive bidding… they require the bidders to fix their price to 15 years,” First Gen Corp. President and Chief Operating Officer Francis Giles B. Puno said during BusinessWorld’s economic forum last week.

Mr. Puno said that all capital expenditures (capex) are basically foreign exchange-driven, adding that a weak peso would make the effective cost higher.

“There are things that I think sometimes we have to be also very practical about. But there’s a balance between addressing the consumer needs (and earning a) reasonable return on a prolonged basis for investors,” Mr. Puno said.

Jaime Z. Urquijo, chief sustainability and risk officer of Ayala-led ACEN Corp., said as the majority of the company’s portfolio are renewable energy based, he said that “it definitely impacts us a little bit less than it could have been.”

On May 21, the peso closed at P58.27 to the dollar, its weakest close in more than 18 months.

Analysts said that prolonged peso weakness may result to an increase in energy costs due to potential higher charges from power plants that run on imported energy resources.

Leonardo A. Lanzona, economics professor at the Ateneo de Manila, said in a chat message that peso weakness will cause energy costs to rise “and will eventually lead to inflation.”

“The government has been trying to defend the peso in small amounts, but this approach is apparently not enough to stop the depreciation,” Mr. Lanzona said.

Mr. Lanzona said interest rates are likely continue to be elevated in order to defend the peso.

“As such, the depreciation, the inflation and the high interest rates will all raise energy costs, resulting in further declines in household consumption,” he said.

Michael  L. Ricafort, chief economist at Rizal Commercial Banking Corp., said the peso depreciation, which he said started early in the year, will correspond to additional import costs that would “lead to some pick up in overall prices/inflation.”

The Monetary Board kept interest rates unchanged at a 17-year high of 6.5% for a fifth straight meeting. Bangko Sentral ng Pilipinas Governor Eli M. Remolona, Jr. signaled that the central bank could start rate cuts as early as August.

“This would lead to higher costs for power plants to be constructed and the other operating costs of power plants for imported fuel, coal, diesel, LNG (liquefied natural gas), equipment, spare parts, and other imported inputs,” he said in a Viber message.

Jose M. Layug, Jr., president of the Developers of Renewable Energy for Advancement, Inc., said any acceleration in the peso’s depreciation may potentially affect oil prices.

This in turn “affects power rates when we utilize more diesel plants in the system,” he said in a Viber message.

Analysts said that renewables may have an edge in such conditions as the technology does not require much importing of inputs like fuel.

“Renewables now offer cheaper and more competitive energy costs. That is why it is critical that we add more RE (renewable energy) capacity ton the system to offset partially any adverse impact of higher oil prices,” Mr. Layug said. 

However, Mr. Lanzona said that without the subsidies from the government for RE, the energy supply from these sources will be limited. — Sheldeen Joy Talavera