• Philippine Resources

Mine-Mouth power plant development to lower electricity cost in the Philippines

By: Guillermo R. Balce, Arnulfo A. Robles, Ismael U. Ocampo and Mars T. Ocampo


ABSTRACT


The development of coal-fired mine-mouth power plants in the Philippines is one measure that can address the country’s need for electricity cost reduction, energy supply security and a shift from coal to renewable energy.


The use of mine-mouth power plants as a low-cost electricity development option in the USA, Thailand, Indonesia, Laos and Mongolia are cited as examples that can guide the Philippines.


A review of coal resources in the country indicates 10 potential sites for mine-mouth power plants distributed in proximity to the electricity grid and HVDC substations. The estimated cost of generating electricity from these sites ranges from Php2.61/kwh to Php4.45/kwh, which is significantly lower than the average generation cost of Php5.425 in 2014.


Because mine-mouth power plants use indigenous coal resources, they can reduce the Philippines’ exposure to coal price volatility and protect the country from coal supply disruption due to commercial and political risks.


Coal-fired mine-mouth power plants utilizing circulating fluidized bed combustion (CFBC) technology and low calorific value lignite can be converted to biomass-fired plants, which can use agricultural waste or wood chips sourced from systematic management of forest areas near plant sites. Thus, coal-fired mine-mouth power development is a potential measure in the country’s quest to shift from coal to renewable energy.


We therefore recommend that coal-fired mine-mouth power plants be given an incentive of priority dispatch similar to renewable energy plants. Benefits to host communities should be increased from 0.01 to 0.02 PhP/kWh (DOE 1-94) to encourage hosting of coal-biomass-fired mine-mouth power plants. COC holders and power plant investors should be encouraged to operate commercial biomass farms or industrial forest management areas in the vicinity of the plants to provide continuous fuel supply. The increment of 0.01 PhP/kWh may be shared among the barangays, municipalities and provinces to encourage the LGUs to host such power plants.


Inclusive economic growth is further assured by organizing the nearby communities into forest management cooperatives to plant and grow appropriate fast-growing tree species to supply the wood chip requirements of the coal-biomass-fired power plant. For instance, planting rubber trees that would provide rubber sap to a nearby rubber factory after 5 years would be ideal. This would provide immediate income after only 5 years up to 10 years when the rubber trees would be fully mature for wood chipping as they no longer produce rubber sap.


By planting specific areas in an organized manner, a continuous year-round supply of biomass wood chips is assured for the power plant, thereby extending the life of the mine-mouth coal reserves. Moreover, the biomass tree farm would ensure ecological balance within the surface/strip mine area. Once the coal reserves are exhausted or deemed expensive to mine, the biomass tree farm would ensure continued power plant operation, provide steady income to local communities and assure the supply of rubber sap to a nearby raw rubber factory.

INTRODUCTION


A mine-mouth power plant is a coal-fired electricity generating plant built near its source of coal, a coal mine. Its location is primarily dictated by water availability, as a 100-MW plant requires about 5 million liters of water per day for cooling and steam production. A run-of-river source with a discharge of 60 liters per second (0.06 cu. m. per sec.) is sufficient. However, water flow must be continuous all year round and ponding is necessary to store and conserve water and prevent warm water from the plant to merge with the cool water of the natural drainage system.


The most widely used coal-fired generating technologies are CFBC and pulverized coal (PC). Table 1 shows the comparative parameters of the different CFBC and PC options. Before 1990, PC technology used turbine generating steam at a subcritical pressure of 16.5 mega pascal (MPa) and a temperature of 540°C. By 1990 the design had improved to a supercritical pressure of ≥ 22.1 MPa and temperatures of 540-560°C. In 1995-2000, this had been upgraded to pressures of 27.5-30 MPa and temperatures of 560-600°C. After 2000, the ultra-supercritical conditions of ≥ 30 MPa and ≥600°C became the most favored design for PC power plants. For mine-mouth power plants that use low-heating value lignite, the favored technology is the supercritical CFBC.



MINE MOUTH AS LOW-COST ELECTRICITY DEVELOPMENT OPTION


North America

Advances in long-range electricity transmission in the 1990s enabled the construction of many mine-mouth power plants in the USA and Western Canada. These plants did not need long-distance rail transport and shipping, which reduced fuel costs by at least 50% and substantially reduced the cost of producing electricity. In 1995, Wyoming coal sent to Georgia, USA was sold for USD 29 per ton while it sold for only USD 13 per ton in Wyoming. The cost of converting coal to electricity in a mine-mouth power plant in Gillete, Wyoming was just a little over one US cent per Kwh.


Thailand

Located in the mountains of Lampang, Thailand, the Mae Moh Power Plant is Southeast Asia’s first mine-mouth power plant. It was built in four phases from 1978 to 1996 by the Electricity Generating Authority of Thailand (EGAT). The power plant at present consists of 10 units with a total installed capacity of 2,400 MW, accounting for 12% of Thailand’s installed capacity and generating approximately 18,000 gigawatt-hours of electricity per year. The nearby Mae Moh Coal Mine supplies 40,000 tons of lignite per day or approximately 16 million tons per year from a coal resource of approximately 864 million tons. The cost of power production is 60 satang per Kwh (1.6 US cent per Kwh). In March 2015 EGAT awarded Alstom Power Systems and Marubeni Corporation an EPC contract for the construction of a new unit with an installed capacity of 600 MW to replace the plant’s existing Units 4 to 7. The new unit is programmed to be commissioned in 2018 and will use the ultra-supercritical boiler and steam turbine technology.


Indonesia

The Indonesian government aims to make mine-mouth power plants as the main source of its 35,000-MW programmed additional capacity by 2019. To encourage coal mine license holders and operators to develop vast but inaccessible lignite deposits for mine-mouth power plants, the Ministry of Energy and Mineral Resources issued regulations (MEMR 10/14 and MEMR 9/16) providing for incentive pricing of coal from mines to mine-mouth power plants with assured margins of 15%-25% over production cost. The resulting minimum regulated price of coal sold to mine-mouth power plants, called “coal base price”, is USD 16.36 per ton at an assured margin of 15% and coal quality of less than GAR 3000 or higher. In response, PT Bukit Asam, Indonesia’s national coal corporation, has committed to build 4,400 MW within its coal concessions in Sumatra. Since May 2010 PT PLN, the national power corporation, has been bidding out approximately 6,510 MW of mine-mouth plants in Sumatra, with an estimated cost of USD 110.44 million per 100 MW. Independent power producers (IPPs) have committed 800 MW also in Sumatra. In East Kalimantan, Borneo Island, coal mining company PT Adaro is constructing a 600-MW mine-mouth plant within its license area.


Laos

In the Lao Peoples Democratic Republic (Lao PDR), the Hongsa Mine Mouth Power Project, a 2,504 MW (4 x 626 MW) mine mouth power plant complex, has been under construction since October 2010. The first two units of 626 MW each were commissioned in 2015, with the third unit commissioned in 2016. The fourth unit began operating this year upon expansion of lignite reserves from 370.8 million tons to 577 million tons with an average heating value of 2500 Kcal/kg. Coal cost averages Baht 300/ton or USD 8.10/ton. Power production is allocated mainly to Thailand’s EGAT under a 25-year power purchase agreement (PPA) with the Thai-Lao Lignite Company at 5.7 US cents per Kwh. Figure 1 is a layout of Hongsa Lignite Mine and Power Plant showing the water source for steam generation and cooling.


Mongolia

In Mongolia, the Chandgana Mine Mouth Power Project is in the last stage of negotiation for government guarantee of revenue requirement for international financing. The project consists of four units of 150 MW each totaling 600 MW licensed since 2010 to Prophecy Power Generation LLC (PPG). Coal source is the Chandgana Tal Coal Deposit of Chandgana Coal LLC, which is 100% owned by Prophecy Development Corporation of Vancouver, Canada, the owner of PPG. Coal supply is 3.6 million tons per year, backed up by measured resource of 733 million tons. The coal supply agreement between Chandgana Coal and PPG is pegged at a coal price of USD 17.70 per ton.


Philippines

In the Philippines, a mine-mouth power plant has been in operation since 2014 as a component of the coal mining operation of the Semirara Mining Corporation in Semirara Island, Caluya Municipality, Antique Province. The plant has a 15-MW capacity using CFBC technology. Production cost is Php 3.55 /Kwh (US cent 7.1/Kwh). In 2014, the Philippine National Oil Company – Exploration Corporation (PNOC-EC) was supposed to start the construction of a 50- to100-MW mine-mouth power plant in Cauayan, Isabela located beside a 25 million-ton lignite reserve. However, in August 2015, the Philippine government deferred approval of the plan pending proof of PNOC-EC’s financial capability to undertake the project. PNOC-EC is currently searching for a viable project partner.


Figure 1

MINE-MOUTH POWER PLANT DEVELOPMENT IN THE PHILIPPINES


The countries cited as examples clearly demonstrate the potential of mine-mouth power development to significantly reduce electricity cost in the Philippines. The 5.7 US cents per Kwh price of electricity sold to Thailand from the Hongsa mine-mouth power plant in Lao PDR is a viable target for mine-mouth power plants in the Philippines. If this cost is doubled to include transmission, distribution and other costs to deliver the electricity to Filipino consumers, the price would be only 11.14 US cents or just a little lower than the 12 US cents that the average American household pays for one Kwh of electricity. The foregoing explores the feasibility and benefits of mine-mouth power plant development in the Philippines.


Figure 2

1. AVAILABILITY AND DISTRIBUTION OF COAL RESOURCES IN RELATION TO THE NATIONAL POWER TRANSMISSION GRID


Figure 2 shows the known coal deposits in the Philippines. The wide distribution of these deposits throughout the archipelago favors the distributed generation of base load electric power, an important factor towards minimizing transmission costs and losses. At least 10 of the deposits have accurate delineation of resources and coal qualities that can be used for mine-mouth power plant planning, as shown in Table 2a and Table 2b.




Figure 3 shows the 10 potential mine mouth plant sites in relation to the existing transmission grid and planned upgrading until 2030. Although the Iguig and Semirara sites will not be connected to the grid until 2022, the other eight sites are within 30 kms of existing HVDC substations where the prospective plants can be connected to the grid.


Figure 3

2. PROJECTED INSTALLED CAPACITIES AND ELECTRICITY PRODUCTION COSTS


The potential installed baseload capacities and electricity production costs are estimated from available data for each of the 10 sites using an investment cost of USD 1,200/KW based on 2014 Indonesian bidding estimates and a higher USD 1,850/KW estimate based on the CFB power plants recently constructed in the Philippines. The two scenarios are given in Table 3a and Table 3b.




Table 3a (at 1,850 $/kW) and Table 3b (at 1,200 $/kW) show the estimated installed capacity, the planned capacity of various proponents and electricity cost from mine-mouth power plants based on planned capacity. The average costs of mine-mouth electricity nationwide are PhP 3.52 and PhP 2.74 /kWh based on USD 1,850 and 1,200 /kW of all-in (installed) capital cost of CFB plant.


The formula for calculating the potential installed capacity from the coal reserves for a 25-year mine-mouth power plant is shown below which assumes a CFBC thermal efficiency of 34.39% (plant heat rate = 3412 / 34.39% = 9,921 Btu/kWh) and net capacity factor of 85%.

MW = (Coal Reserve/25 x 10^6 x 10^3) x GHV x 2.2046 x (34.39% / 3412) / (365 x 24 x 85%) / 1000


The total potential installed baseload capacity is 1,828 MW or about 10.4 % of the existing installed capacity of 17,610.8 MW nationwide. The planned capacity addition from mine-mouth power plants from prospective developers aggregates to a higher capacity of 1,985 MW or 11.3% of existing installed capacity.


3. OVERALL REDUCTION IN AVERAGE ELECTRICITY RATES


The following Table 4 shows the price breakdown of electricity in 2004 and 2014 and the average annual growth rate of each component (Final Report of Task Force on Reducing the Cost of Electricity Power, 2014). Generation cost is Php5.425/kWh in 2014 and is growing at an average annual growth rate of 4.6%, while total delivered electricity cost inclusive of transmission, system loss, distribution, subsidies, universal charge and government taxes aggregate to Php9.568 /kWh in 2014 with an average annual growth rate of 4.7% p.a.

Table 4. Electricity Cost Components and Annual Average Growth Rates (2004, 2014).


Table 4

Reduction in electricity cost at USD1,850/kW


Using the current Philippine all-in capital cost (overnight cost) for a mine-mouth CFBC of USD1,850/kW, the average price of electricity from these mine-mouth power plants is Php3.52 /kWh (7.49 US cents/Kwh). (see box below)


The current grid rate average of Php5.425 /kWh (11.54 US cents/Kwh) at present can be substantially reduced and a lower weighted average grid rate from blending the two rates will be achieved at Php5.232 /kWh (11.13 US cents/Kwh) or a significant reduction of 3.56% relative to 2014 grid rates.



Reduction in electricity cost at USD1,200/kW


Using the all-in capital cost from winning bidders in Indonesia for mine-mouth CFBC of USD1,200/kW, the average price of electricity from these mine-mouth power plants is Php2.74 /kWh (5.83 US cents/Kwh). (see box below)


The current grid rate average of Php5.425 /kWh (11.54 US cents/Kwh) at present can be substantially reduced and a lower weighted average grid rate from blending the two rates will be achieved at Php5.153/kWh (10.96 US cents/Kwh) or a significant reduction of 5.01% relative to 2014 grid rates.



Major Assumptions for the Project Finance Model (DCF IRR)


The DCF IRR model was converged to project NPV equal to zero at the target project IRR (100% equity, 0% debt) of 12% p.a. The model also computes the expected equity NPV, equity IRR and other calculated parameters such as project PAYBACK, equity PAYBACK and debt service cover ratio (DSCR – minimum, average, and maximum).


The project finance model (discounted cash flow IRR method) used the following input assumptions in running each mine-mouth capacity of a given mine-mouth resource area. (see next box)



4. ADDITIONAL BENEFITS OF MINE-MOUTH POWER DEVELOPMENT


Aside from the reduction of electricity generation cost, mine mouth power plant development in the Philippines could contribute tremendous benefits to the economy and provide sustainability in power development. These are:


a. Savings in petroleum fuel use,

b. Savings in foreign exchange for imported coal,

c. Protection from coal supply disruption and coal price volatility,

d. Potential to shift from coal to renewable energy, and

e. Enhance inclusive growth and sustainability of power development.


Reduction of transportation distance for supplying coal from mine to power plant should result in significant savings in petroleum fuel use. The minimum savings would be the amount of diesel oil to be used in transporting the coal to the nearest shore where a power plant may be located or a ship can carry the coal to a plant. Considering the 10 potential mine mouth plant sites above, the minimum savings in diesel oil is thus estimated to be about 469.8 million liters or 2.9 million barrels.


Savings in foreign exchange for imported coal can be estimated from the present price of about USD30/ton-CFR of lignite from Indonesia that is imported by the newly installed CFB power plants in the Philippines. Assuming that this price remains as the average during the 25-year life of the power plants, the total avoided foreign exchange cost of the 450 million tons used during 25 years is about USD 13.5 billion.


Figure 4

During the past five years (2009-2015), coal prices experienced steep fluctuations. Figure 4 shows the volatility of coal prices and the recent uptrend from a long period of declining prices. Mine-mouth power plant development would certainly protect the Philippines from the negative effects of coal price volatility and supply disruptions stemming from Indonesia’s moratorium on coal shipments to the Philippines due to hijacking and piracy of coal barges in the seas between the two countries.


With the high fuel flexibility of CFBC technology, it is now possible for power plants to shift from lignite to biomass. A mine-mouth plant running on CFBC and coal fuel with heating value of 2500 Kcal/kg can be converted to a biomass-fueled plant with no drastic changes in turbine and boiler conditions. It is possible to plan the construction of a mine-mouth power plant that will run on lignite for the first 10 to 15 years and then switch to biomass or wood chips. A parallel development of commercial biomass-producing farms and/or industrial forest management areas in the plant’s vicinity can be implemented during the first half of the plant’s lifespan; the plant can subsequently function as a biomass-fired power plant for the remainder of its lifespan. This concept can address the clamor of climate change mitigation advocates for a shift from coal to renewable energy.


Inclusive economic growth is further assured by organizing the nearby communities to forest management cooperatives that can plant and grow appropriate fast-growing tree species to supply the wood chip requirements of the coal-biomass-fired power plant. For instance, planting rubber trees that would provide rubber sap to a nearby rubber factory after 5 years would be ideal. This would provide immediate income after only 5 years up to 10 years when the rubber trees would be fully mature for wood chipping as they no longer produce rubber sap. By planting specific areas in an organized manner, a continuous supply of biomass wood chips is assured for the power plant, thereby extending the life of the mine-mouth coal reserves. Moreover, the biomass tree farm would ensure ecological balance within the surface/strip mine area. Once the coal reserves are exhausted or deemed expensive to mine, the biomass tree farm would ensure continued power plant operation and provide a steady supply of rubber sap to a nearby raw rubber factory.


Mine-mouth power plant development contributes to inclusive growth because it requires indigenous fuel sources and local labor. Moreover, the potential for mine-mouth plants to convert from coal to renewable biomass-fired plants ensures sustainability.


CONCLUSIONS

Mine-mouth power development can greatly reduce the cost of electricity and provide many additional benefits to the Philippine economy, namely:


a. Savings in petroleum fuel use,

b. Savings in foreign exchange for imported coal,

c. Protection from coal supply disruption and coal price volatility,

d. Potential to shift from coal to renewable energy, and

e. Enhance inclusive growth and sustainability of power development.


POLICY RECOMMENDATIONS

1. Priority dispatch for mine-mouth power plants.

2. Priority supply of electricity to host communities.

3. Upgrading benefits to host communities of MMPPs.

4. Develop commercial biomass farms for producing wood chips to replace coal once it is mined out or becomes economically non-viable to extract due to high strip ratio.

The initial coal mining operation and power generation will provide the needed capital to start the commercial operation of the biomass farm utilizing local labor with expert assistance from relevant agencies to ensure inclusive growth and sustainability in rural areas.

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